Assume an economy where there are two producers: a wheat producer and a bread pr

Question

Assume an economy where there are two producers: a wheat producer and a bread producer. In a given year, the wheat producer grows 30 million bushels of wheat of which 25 million bushels are sold to the bread producer at $ 3 per bushel, and 5 million bushels are stored by the wheat producer to use as seed for next year’s crop. The bread producer produces and sells 100 million loaves of bread to consumers for $ 3.50 per loaf. Determine GDP in this economy during this year using the product and expenditure approaches.

Explanation / Answer

Product approach:

Product accounting adds up value added by all producers. The wheat producer has no intermediate inputs and produces 30 million bushels at $3/bu. for $90 million. The bread producer produces 100 million loaves at $3.50/loaf for $350 million. The bread producer uses $75 million worth of wheat as an input. Therefore, the bread producer’s value added is $275 million. Total GDP is therefore $90 million + $275 million = $365 million.

Expenditure approach:

Expenditure accounting adds up the value of expenditures on final output. Consumers buy 100 million loaves at $3.50/loaf for $350 million. The wheat producer adds 5 million bushels of wheat to inventory. Therefore, investment spending is equal to 5 million bushels of wheat valued at $3/bu., which costs $15 million. Total GDP is therefore $350 million + $15 million = $365 million.

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