Question

14. One bag of flour is sold for $1.55 to a donut shop, which uses the flour to make 120 donuts that sold for

$0.99 each to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.29. Taking these

three transactions into account, what is the effect on GDP?

a. GDP increases by $118.80.

b. GDP increases by $122.64.

c. GDP increases by $121.09.

d. GDP increases by $3.84

Answer 1

So here we only take into account the selling price of the final goods and not the intermediary goods. When flour is sold to the doughnut shop, it is an intermediary good. It is assumed that the cost of the same is included in the selling price of doughnut. So adding it separately would lead to double counting. Same is the case with the flour being sold to consumer in the grocery store. The selling price includes the cost and therefore the final selling price is taken in calculation of GDP

GDP increase = Price of doughnut x number of doughnut + price of flour at grocery store

GDP increase = 120 x 0.99 + 2.29

GDP increase = $121.09

So the correct option is c