Answer to Question #199713 in Macroeconomics for Salman

Question

A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is GDP?

Answer 1

GDP is the gross domestic product which is the value of total goods and services produced in an economy during a given period of time at given prices.

Value added is the difference between the value of output and the value of intermediaries used to produce that output.

In the given question, value added for the farmer will be $1 as he sold the bushel of wheat to the miller as $1.

Value added for miller is value of flour - value of wheat i.e. 3-1=$2

Value added for baker is value of bread - value of flour i.e. (6-3) $3

Since GDP is the sum of value added, so :

GDP=1+2+3

GDP=$6