Use the following information to answer the question.
There are three firms in an economy: X,Y,Z.
Firm X buys $200 worth of goods from firm Y, and $300 worth of goods from firm Z, and produces 250 units of output at $4 per unit.
Firm Y buys $150 worth of goods from firm X, and $250 worth of goods from firm Z, and produces 300 units of output at $6 per unit.
Firm Z buys $75 worth of goods from firm X, and $50 worth of goods from firm Y, and produces 500 units of output at $2 per unit.
Given this information, what is the ecomony's GDP(Gross Domestic Product?
Hint: remember that part of each firm's production is used by one of the other firms as a production input(an intermediate product).
Answer the above question
To calculate the economy's GDP, we need to add up the value of all final goods and services produced within the economy. However, we should exclude the value of intermediate goods, which are goods used in the production process by one firm and then sold to another firm.
In this given information, we have the following transactions:
1. Firm X buys $200 worth of goods from firm Y and $300 worth of goods from firm Z. Firm X also produces 250 units of output at $4 per unit.
- The value of goods bought by firm X ($200 + $300) is considered an intermediate good since it is not the final use of the product. Therefore, we exclude this value.
- The value of firm X's final production is 250 units * $4 per unit = $1000.
2. Firm Y buys $150 worth of goods from firm X and $250 worth of goods from firm Z. Firm Y also produces 300 units of output at $6 per unit.
- The value of goods bought by firm Y ($150 + $250) is considered an intermediate good, so we exclude it.
- The value of firm Y's final production is 300 units * $6 per unit = $1800.
3. Firm Z buys $75 worth of goods from firm X and $50 worth of goods from firm Y. Firm Z also produces 500 units of output at $2 per unit.
- The value of goods bought by firm Z ($75 + $50) is considered an intermediate good and not part of GDP.
- The value of firm Z's final production is 500 units * $2 per unit = $1000.
To calculate the GDP, we sum up the final production of all three firms:
GDP = $1000 (Firm X) + $1800 (Firm Y) + $1000 (Firm Z) = $3800.
Therefore, the economy's GDP is $3800.