Answer to Question #156025 in Macroeconomics for A

Question

The company X sells $20,000 worth of cotton to company Y, which uses the cotton to make shirts that sell for $30,000. What is the total contribution to GDP from these transactions?

Answer 1

$\bold {Answer}$

Total contribution to GDP = $30,000

$\bold {Solution}$

In computing GDP, only the value of the final product is considered. Intermediate goods are not counted for they will result in double counting. Therefore, the $20,000 cotton produced by company X is not considered because it is an intermediate good: it is a raw material for shirts production by company Y.

The final product of the whole production/value chain are shirts produced by company Y. Hence, the value to be included in GDP is the $30,000 value of shirts.

Alternatively, the contribution to GDP can be approached through value added approach where the value added by each firm in the value chain are summed.

Assuming company X started from scratch, value added = $20,000

Company Y value added

= $30,000 - $20,000

= $10,000

Hence, contribution to GDP

= Total value added by each firm

= $20,000 + $10,000

= $30,000