Question

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barn by's store to be sold later. What is GDP here?

a. $40
b. $60
c. $80
d. $100

Answer 1

c. $80

Step-by-step explanation:

GDP is the value in money of all finished goods and services within a country. It shows how good a country's economy is and provides a good estimate of the growth rate of the country.

The wool that Angus sells to the farmer is not part of the GDP since it is not a finished goods but an intermediate goods. Even though one sweater is sold, to calculate the GDP we use the value of two sweaters since two sweaters were produced.

GDP = 2 × $40 = $80

Answer 2

$80

Step-by-step explanation:

GDP is the total market value of final goods and services produced within an economy. The wool sold by Angus to Barnaby is an intermediate goods. We can not take the value of an intermediate good and add to the GDP as it is part of what was used to produce the sweaters.

So two sweaters were produced as final goods, one sold to Collette and the other remains.

The GDP is therefore the value of the two sweaters produced as final good. GDP = 2 × $40 = $80