Question

Assume an economy with two firms. Firm A produces wheat and firm B produces bread. In a given year, firm A produces 50,000 bushels of wheat, sells 20,000 bushels to firm B at $3 per bushel, exports 25,000 bushels at $3 per bushel, and stores 5,000 bushels as inventory. Firm A pays $50,000 in wages to consumers. Firm B produces 50,000 loaves of bread, and sells all of it to domestic consumers at $2 per loaf. Firm B pays consumers $20,000 in wages. In addition to the 50,000 loaves of bread consumers buy from firm B, consumers import and consume 15,000 loaves of bread, and they pay $1 per loaf for this imported bread. Question: Calculate the GDP for the year using the expenditure approach.

Answer 1

Firm A's output = bushels of wheat x price per bushel = 50,000 x $3 = $150,000

We don't need to take into account the $50,000 firm A pays as wages since it is already included in the value of its output.

Firm B's output = loaves of bread x price per loaf - Input cost of wheat = 50,000 x $2 - 20,000 x $3 = $40,000

We don't need to take into account the $20,000 firm B pays as wages since it is already included in the value of its output.

We also need to subtract the $15,000, i.e., the value of imported bread to arrive at the GDP.

GDP = Output of firm A + Output of firm B - Imports = $150,000 + 40000 - 15000 = $175,000