Question

One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $6.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $3.00. Taking these three transactions into account, what is the effect on GDP?

a.	GDP increases by $9.00.
b.	GDP increases by $3.00.
c.	GDP increases by $8.00.
d.	GDP increases by $7.00.

If net exports is a positive number for a particular year, then

a.	the value of firms’ inventories declined over the course of the year.
b.	consumption exceeded the sum of investment and government purchases during the year.
c.	the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
d.	the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

Answer 1

Q1.

One bag of flour is sold directly to the consumer at a price of $3.00. GDP contribution = $3 (under the category of 'consumption')

Another bag was sold to a bakery at $1.00 which was baked into bread and sold at $6.00. Here, the bag of flour was sold as an intermediate good which was used to produce a final good i.e., bread. Intermediate goods are not accounted for under GDP. Therefore, the contribution of these 2 transactions = $6 from the baked bread.

Total effect: GDP increases by ($3.00 + $6.00) = $9.00

Ans: a. GDP increases by $9.00

Q2. Net Exports, NX = Exports (X) - Imports (M)

If NX > 0

=> X - M > 0

=> X > M

If Net Exports is positive, then it indicates that the exports exceed imports i.e., the value of goods sold to foreigners exceed the value of foreign goods purchased during the given period

Ans: c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year