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Difficulty: EasyOutput (Value Added) Method of Measurement

A wheat farmer sells harvested wheat to a flour mill for ₦150,000. The flour mill processes the wheat into flour and sells it to a bakery for ₦220,000. The bakery uses the flour to produce bread, which is sold to final consumers for ₦300,000. Using the output (value added) method of national income accounting, what is the net contribution of this production chain to Gross Domestic Product (GDP)?

  1. ₦300,000Answer
  2. B
    ₦670,000
  3. C
    ₦370,000
  4. D
    ₦150,000

Answer

The net contribution of this production chain to GDP is ₦300,000.
The output (value added) method measures GDP by taking the gross value of output at each stage of production and subtracting the cost of intermediate consumption. The farmer adds ₦150,000, the mill adds ₦70,000 (₦220,000 - ₦150,000), and the bakery adds ₦80,000 (₦300,000 - ₦220,000). Summing these gives ₦300,000, which is equal to the value of the final consumer product.

Step-by-Step Solution

1
Calculate the value added by the wheat farmer
Value Added = ₦150,000 - ₦0 = ₦150,000
The raw wheat is sold for ₦150,000 with zero intermediate input costs recorded.
2
Calculate the value added by the flour mill
Value Added = ₦220,000 - ₦150,000 = ₦70,000
The mill buys wheat for ₦150,000 and sells flour for ₦220,000.
3
Calculate the value added by the bakery
Value Added = ₦300,000 - ₦220,000 = ₦80,000
The bakery buys flour for ₦220,000 and sells bread to consumers for ₦300,000.
4
Sum the value added across all stages to find total GDP contribution
Total Value Added = ₦150,000 + ₦70,000 + ₦80,000 = ₦300,000
The output method sums the net additions to output at each production stage to avoid double counting.

Key Concept

Value Added Method of National Income Accounting
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Topics

Output (Value Added) Method of Measurement

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