Question

Consider a hypothetical economy in which a farmer sells 10 kg of wheat to a flour mill for Rs 6 per kg. The mill owner sells the 10 kg of wheat flour to a biscuit company for Rs 12 per kg. The biscuit company produces biscuits and sells 100 packets of biscuits at the rate of Rs 60 in the market. Except for these, there is no other economic activity in this economy. What will be the value of GDP for this economy?

Answer 1

The value of GDP will be of final goods.

• Only the value of final products is taken into account when measuring GDP. The problem of double counting arises when the value of goods and services is estimated more than once.
• Since the value of intermediate products is expressed in value of final goods, the value of intermediate goods is not included in the calculation of gross domestic product.
• In the given situation biscuits are the final goods that are purchased by the consumer. Wheat and wheat flour are the intermediate goods used in the production of final good.
• The value of biscuit, Rs 60 includes the value of flour, Rs 12. Hence, only the value of final goods and services are taken into consideration.