. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by each person? What is GDP?

(a) $1; $2; $3; $0

(b) $6

Explanation:

Value added in a good is defined as the difference between the selling price and production cost.

(i) Value added by farmer = Bushel of wheat sold to miller

                                           = $1

(ii) Value added by miller:

= Selling price of flour - Purchasing price of wheat

= $3 - $1

= $2

(iii) Value added by baker:

= Selling price of bread - Purchasing price of flour

= $6 - $3

= $3

(iv) Value added by an engineer:

= $0

Because engineer is the final consumer of bread.

Gross domestic product (GDP):

= Value added by farmer + Value added by miller + Value added by baker + Value added by an engineer

= $1 + $2 + $3 + $0

= $6

Value Added :- Farmer : $1 ; Miller : $2 ; Baker : $3

GDP = $6

Explanation:

Value Added is the Value of Output less intermediate inputs.

Value Added = Value of Output - Intermediate Inputs

Farmer Value Added = Value of Wheat - Intermediate Inputs

= 1 - 0 = $1

Miller Value Added  = Value of Flour - Value of Wheat

= 3 - 1 = $2

Baker Value Added = Value of Bread - Value of Flour

= 6 - 3 = $3

GDP is total value of goods & services produced in an economy, during a given period of time. It is sum of Value Added ; GDP =  Σ GVA.

GDP = 1 + 2 + 3 = $6

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