Question

Regional Aluminum Corp. sells $11 million worth of aluminum to National Foil Corp., which uses the aluminum to make aluminum foil. National Foil Corp. sells $14 million worth of aluminum foil to households. How much do these transactions contribute to GDP?

Answer 1

Answer:

$14 million

Explanation:

The full meaning of GDP is Gross Domestic Product and it is the monetary value of every final commodities produced within a country during specified period of time.

The are three approaches to measuring GDP: output approach which measures GDP as the total value of all commodities produced; income approach which measures GDP as total factor income; and expenditure approach which measures GDP as the total amount of money spent.

Among the three approaches, the relevant approach to this question is the output approach. The reason is that avoids the problem of double counting by considering only the value of finished good in its GDP measurement by not including the value of intermediate goods used in producing the final good.

In this question, $11 million worth of aluminum is an intermediate good and will not be considered in the GDP calculation, while $14 million worth of aluminum foil to households is a final good which the only relevant to be considered as contribution to GDP.

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