Assume an economy where there are two producers: a wheat producer and a bread pr

Question

Assume an economy where there are two producers: a wheat producer and a bread producer. In a given year, the wheat producer grows 30 million bushels of wheat of which 25 million bushels are sold to the bread producer at $ 3 per bushel, and 5 million bushels are stored by the wheat producer to use as seed for next year’s crop. The bread producer produces and sells 100 million loaves of bread to consumers for $ 3.50 per loaf. Determine GDP in this economy during this year using the product and expenditure approaches.

Explanation / Answer

The output of wheat producer is worth 30*3=$90 million

The stock sold =25*3=$75 million

Stock left with Wheat producer will be worth $15 million

Bread producer produces 100 milion oaves of bread worth 100*3.5=$350million

The GDP by product method will be =$350million+$15 million

GDP=$365million

the value of stock sold by wheat producer is already included in the value of bread, hence not included to avoid double counting.

Expenditure Method

this methods takes into account only the expenditure incurred in the economy

It will include

GDP=$350million+$15million

GDP=$365million

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