Question

A farmer grows wheat, which she sells to a miller for $100. the miller turns the wheat into flour, which she sells to a baker for $150. the baker turns the wheat into bread, which she sells to consumers for $180. consumers eat the bread.

Answer 1

This statement illustrate how the gross domestic product of a country measures the economy actitivity.

Gross domestic product (GDP) is a very importan macroeconomic index.

The bread produced has an economical value of $180, which is the value at which the last producer of the chain (the baker) sells the bread.

This value (the GDP) was form by adding the contributions (value added) of all the producers (the farmer, the miller and the baker).

1) Value added by the farmer = $100

2) Value added by the miller = $50

3) Value added by the baker = $30

Then the total value added = $100 + $50 + $30 = $180.

Then in this example you can see how the total value added for all the producers equal the total income.