Question

Use the following information to answer the question: There are three firms in an economy: X, Y, and Z. Firm X buys $400 worth of goods from Firm Y, and $200 worth of goods from Firm Z to produce 250 units of output at $3 per unit. Firm Y buys $250 worth of goods from Firm X and $250 worth of goods from Firm Z to produce 250 units of output at $4 per unit. Firm Z buys $100 worth of goods from Firm X and $500 worth of goods from Firm Y to produce 500 units at $2 per unit. Given this information, using the Value Added approach to eliminating intermediate goods and services (in order to avoid double-counting), what is the economy's GDP

Answer 1

Answer:

$1,050

Explanation:

Value Added Approach to calculating the GDP avoids double counting by adding only the value addition of all firms in an economy to obtain the GDP. Value addition for each firm can be calculated by deducting the intermediate purchase of each firm from its intermediate sales as follows:

Firm X value addition = ($250 * 3) - $400 - $200 = $750 - $600 = $150

Firm Y value addition = ($250 * 4) - $250 - $250 = $1,000 - $500 = $500

Firm Z value addition = (500 * 2) - $100 - $500 = $1,000 - $600 = $400

Therefore, we have:

The economy's GDP = $150 + $500 + $400 = $1,050