Answer to Question #63105 in Economics for Awais

Question

Consider an economy that consists only of those who bake bread and those who produce its
ingredients. Suppose that this economy’s production is as follows: 1 million loaves of bread
(sold at Rs. 2.00 each); 1.2 million pounds of flour (sold at Rs. 1.00 per pound) and 100,000
pounds each of yeast, sugar & salt (all sold at Rs. 1.00 per pound). The flour yeast, sugar &
salt are sold only to bakers, who use them exclusively for the purpose of making bread.
a. Calculate the total income of the economy.
b. How much value is added to the flour, yeast, sugar & salt when the bakers turn into
bread?

Answer 1

Suppose that this economy’s production is as follows: 1 million loaves of bread (sold at Rs. 2.00 each); 1.2 million pounds of flour (sold at Rs. 1.00 per pound) and 100,000 pounds each of yeast, sugar & salt (all sold at Rs. 1.00 per pound). The flour yeast, sugar & salt are sold only to bakers, who use them exclusively for the purpose of making bread.
a. The total income of the economy will include only the value of the final goods (of bread in our case), so the total income of the economy is Y = 2*1 million = Rs. 2 million.
b. As we don't count the value of intermediate goods (flour, yeast, sugar, salt), then the value added to the flour, yeast, sugar & salt when the bakers turn into bread is zero.