Question 1: GDP Three Ways (Lecture #2)
In this problem we'll go through the different ways to calculate GDP: the production (or
value-added) approach, the expenditures approach, and the income approach.
Let's revisit the Starch Economy, which consists of farmers and bakers. In a given year,
farmers grow 20 bushels of wheat, and bakers produce 100 loaves of bread. The market
price of wheat is $(5)/(b)ushel, and the price of bread is $(2)/() loaf. Of the 20 bushels of wheat
produced, 15 are used in the production of bread, and 5 are saved (i.e. invested) so that
the farmers can expand their production next year. All of the loaves of bread are sold to
consumers. Farmers pay $50 in wages to their hired workers, and bakers pay $75 in
wages. (To simplify, we'll assume that there is no government to spend or collect taxes,
and that the economy is "closed" meaning that there are no imports or exports.)
(A) Let's calculate GDP using the production approach. Recall that value-added is the
market value ( P * Q ) of goods sold, minus the value of intermediate goods used in
production. (1) Calculate the value-added produced by farmers. (2) Calculate the
value-added produced by bakers. (3) Now add them up to obtain GDP. What is
GDP?
Answer:
Question 1: GDP Three Ways (Lecture #2)
In this problem we'll go through the different ways to calculate GDP: the production (or value-added) approach, the expenditures approach, and the income approach.
Let's revisit the Starch Economy, which consists of farmers and bakers. In a given year, farmers grow 20 bushels of wheat, and bakers produce 100 loaves of bread. The market price of wheat is $5/bushel, and the price of bread is $2/loaf. Of the 20 bushels of wheat produced, 15 are used in the production of bread, and 5 are saved (i.e. invested) so that the farmers can expand their production next year. All of the loaves of bread are sold to consumers. Farmers pay $50 in wages to their hired workers, and bakers pay $75 in wages. (To simplify, we'll assume that there is no government to spend or collect taxes, and that the economy is "closed" meaning that there are no imports or exports.)
(A) Let's calculate GDP using the production approach. Recall that value-added is the market value (P * Q) of goods sold, minus the value of intermediate goods used in production. (1) Calculate the value-added produced by farmers. (2) Calculate the value-added produced by bakers. (3) Now add them up to obtain GDP. What is GDP?
Answer: