Question

A farmer grows wheat, which she sells to a miller for $100. The miller turns the wheat into flour, which she sells to a baker for $150. The baker turns the wheat into bread, which she sells to consumers for $180. Consumers eat the bread.

GDP in this economy is $ _______-
Value added is defined as the value of a producer's output minus the value of the intermediate goods that the producer buys to make the output.

Answer 1

The nation's GDP, which is the value of all final goods produced, is $500. This total includes the value of unprocessed trees ($100), the lumber ($150), and the bookshelves ($250).

Step-by-step explanation:

In calculating the Gross Domestic Product (GDP) of the small nation, we focus on the value of final goods produced. GDP measures the total dollar value of all final goods and services produced within a country's borders in a specific period. Here, we have three transactions:

• Trees worth $200 were cut down.
• Some of these trees worth $100 were processed into $150 worth of lumber.
• $100 worth of lumber was used to create $250 worth of bookshelves.

The value of the final goods produced includes the trees that were not processed ($200 - $100 = $100 of trees), the lumber ($150), and the bookshelves ($250), summing up to a total GDP of $500. We do not include the intermediate value of trees that were turned into lumber since that value is already captured in the final products (lumber and bookshelves).