Question

9) Problems and Applications Q9

A farmer grows wheat, which she sells to a miller for $90. The miller turns the wheat into flour, which she sells to a baker for $145. The baker turns the wheat into bread, which she sells to consumers for $155. Consumers eat the bread.

Assume that the above transactions account for all economic activity in an economy.

GDP in this economy is $______

Value added is defined as the value of a producer’s output minus the value of the intermediate goods that the producer buys to make the output.

Assuming there are no intermediate goods beyond those previously described, complete the following table by calculating the value added for each of the three producers. Then enter the total value added in the final row.

Assuming there are no intermedlate goods beyond t the three producers. Then enter the total value add Value Added Producer (Dollars) Farmer Miller Baker Total True or False: The total value added for the three True

True or False: The total value added for the three producers in this economy does not equal the economy’s GDP.

True

False

Answer 1

A farmer grows wheat, which she sells to a miller for $\$ 90 .$ The miller tums the wheat into flour, which she sells to a baker for $\$ 145 .$ The baker tums the wheat into bread, which she sells to consumers for $\$ 155 .$ Consumers eat the bread.

Assume that the above transactions account for all economic activity in an economy.

From the given information, it is clear that the GDP is $\$ 155,$ because GDP refers to the market value of final product and services which is produced in the economy during a specific year.

Value added is defined as the value of a producer's output minus the value of the intermediate goods that the producer buys to make the output.

Assuming there are no intermediate goods beyond those previously described, complete the following table by calculating the value added for each of the three producers. Then enter the total value added in the final row.

With the given information, it is clear that, the farmer adds $\$ 90$. The miller adds $\$ 55 .$ The baker adds $\$ 10 .$

Thus, the total value added is ( $\$ 90+\$ 55+\$ 10=\$ 155$ ) which is equal to GDP.

The total value added for the three producers in this economy do not equal the economy's GDP is the false statement, because the GDP is equal to value added for the producers in the economy.