Question

In: Economics

There is a small place that makes pizza produces three goods (bread, cheese, and pizza), each...

There is a small place that makes pizza produces three goods (bread, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all the inputs they need to make bread and cheese, respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labour to help produce their goods, and the difference between the value of goods sold and the sum of labour and input costs is the firm’s profit. The accompanying table summarises the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas.

Bread Company

Cheese Company

Pizza Company

Cost of inputs

$0

$0

$30 (bread)

$31 (cheese)

Wages

15

13

40

Value of output

30

31

231

What is the value added for the bread company? (Answer is 30, how did they get that?)

What is the value added in the cheese company? (Answer is 31, how did they get that?)

What is the value added in the pizza company? ? (Answer is 170, how did they get that?)

What is the GDP in terms of value added? (Answer is 231, how did they get that?)

Solutions

Expert Solution

The value added is the difference between the value of output and the cost of inputs.

Calculate the value added for the bread company -

Value added = Value of output - Cost of inputs

Value added = $30 - $0

Value added = $30

Thus,

The value added for the bread company is $30.

Calculate the value added in the cheese company -

Value added = Value of ouptut - Cost of inputs

Value added = $31 - $0

Value added = $31

Thus,

The value added in the cheese company is $31.

Calculate the value added in the pizza company -

Value added = Value of output - Cost of bread purchased from bread company - Cost of cheese purchased from the Cheese company

Value added = $231 - $30 - $31

Value added = $170

The value added in the pizza company.

Calculate the GDP in terms of value added -

GDP = Value added in the bread company + Value added in the Cheese company + Value added in the Pizza company

GDP = $30 + $31 + $170

GDP = $231

Thus,

The GDP in terms of value added is $231.

Rahul Sunny answered 1 year ago
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