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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby’s store to be sold later. What is GDP here?

a. $40

b. $60

c. $80

d. $100

To determine

The GDP of the economy.

Explanation

GDP is the summation of monetary value of all the goods and services that are produced by the country within its political boundary, within a financial year. Thus, it will take all the final goods and services produced in a year in the country into accounts. Here, the sheep’s wool is an intermediate commodity, which means it is a raw material, and it is turned into the final good by person B. The quantity is two and the market price of each commodity is $40. Thus, the contribution to GDP can be calculated by multiplying the final good’s quantity with the per-unit price.

Option (c):

The quantity of sweaters is two and the per-unit price of sweaters is $40. Thus, the contribution to GDP can be calculated by multiplying the final goods quantity with the per-unit price as follows:

GDP=Quantity of goods produced×Per unit price of Good=2×40=80

Thus, the GDP here is $80, which is equal to the value given in option ‘c’

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