Question

There are three firms in an economy: A, B, and C. Firm A buys $250 worth of goods from firm B and $200 worth of goods from firm C, and produces 200 units of output, which it sells at $5 per unit. Firm B buys $100 worth of goods from firm A and $150 worth of goods from firm C, and produces 300 units of output, which it sells at $7 per unit. Firm C buys $50 worth of goods from firm A and nothing from firm B. It produces output worth $1,000. All other products are sold to consumers. Calculate GDP.

Answer 1

Answer: $3,350

Explanation:

GDP is the addition of value of goods and service minus purchase of intermediate goods.

Formula to calculate value-added by each firm is shown below:

Value-added = Sales by Firm + Change in stock – purchase of raw material

Value added by firm A = $5 × 200 + 0 – ($250 + $200)

                                      = $550

Value added by firm B = $7 × 300 + 0 – ($150 + $100)

                                      = $1,850

Value added by firm C = $1,000 + 0 - $50

                                      = $950

Economy's GDP = Value added by firm A + Value added by firm B + Value added by firm C

                           = $550 + 1,850 + 950

                           = $3,350

The value of GDP is $3,350