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The small economy of Pizzania produces three goods (bread, cheese, and pizza), each produced by a separate company. The bread and cheese companies produce all the inputs they need to make bread and cheese, respectively. The pizza company uses the bread and cheese from the other companies to make its pizzas. All three companies employ labor to help produce their goods, and the difference between the value of goods sold and the sum of labor and input costs is the firm’s profit. The accompanying table summarizes the activities of the three companies when all the bread and cheese produced are sold to the pizza company as inputs in the production of pizzas. Bread Cheese Pizza company company company Cost of inputs $0 $0 $50 (Bread) 35 (Cheese) Wages 15 20 75 Value of output 50 35 200 Bread Cheese Pizza company company company Cost of inputs $0 $0 $50 (Bread) 35 (Cheese) Wages 25 30 75 Value of output 100 60 200 Computers DVDs Pizza Year Price Quantity Price Quantity Price Quantity 2006 $900 10 $10 100 $15 2 2007 1,000 10.5 12 105 16 2 2008 1,050 12 14 110 17 3 a. Calculate GDP as the value added in production. b. Calculate GDP as spending on final goods and services. c. Calculate GDP as factor income.
3. a) To calculate GDP as the value added in production, we need to sum all value added (value of output less input costs) for each company. Value added in the bread company is $50.
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