Question

6. Consider an economy that consists only of those who bake bread and those who produce its
ingredients. Suppose that this economy’s production is as follows: 1 million loaves of bread
(sold at $2 each); 1.2 million pounds of flour (sold at $1 per pound); and 100,000 pounds
each of yeast, sugar, and salt (all sold at $1 per pound). The flour, yeast, sugar, and salt are
sold only to bakers, who use them exclusively for the purpose of making bread.
a. What is the value of output in this economy (i.e., nominal GDP)?
b. How much value is added to the flour, yeast, sugar, and salt when the bakers turn them
into bread?

Answer 1

a. The value of output will include only the value of the final goods (of bread in our case), so the total income of the economy is $Y = 2\times 1\space million = Rs. \space 2 million.$

b. As we don't count the value of intermediate goods (flour, yeast, sugar, salt), then the value added to the flour, yeast, sugar & salt when the bakers turn into bread is zero.