Question

Manufacturing autos may occur in three stages; iron ore is mined and transformed into steel. The steel is then used in automobiles sold to the public. Cleveland Ore mines the ore, assume it takes $1 million in revenue with costless inputs. Ore EO Company transforms the raw iron into the steel with a value of $3 million. Finally Vespa sells the autos to final users, its revenues are $5 million.

1. Complete the table below to calculate the value added by each firm.

Firm	Revenues	Cost of purchased Inputs	Value added
Cleveland Ore
Ore EO
Vespa

1. Suppose all these transactions took place in 2018. By how much did GDP increase because of these transactions?
2. Suppose that Cleveland Ore mined the ore in June 2017 and sold it to Ore EO in October 2017. Ore EO then sold the steel to Vespa in December 2017. Vespa sells the autos in January of 2018. By how much did GDP increase in 2017 and 2018 as a result of these transactions?

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Answer 1

Answer:

GDP is the adition of value added by all the sectors in the economy.

Firm	Revenue	Cost of purchased input	Value added
Cleveland Ore	$1 million	0	$1 million
Ore EO	$3 million	$1 million	$2 million
Vespa	$5 million	$3 million	$2 million
Total value added			$5 million

If all the transactions took place in 2018 and Total value added by all the firms is $5 million therefore GDP increase will be $5 million for the year 2018.

If sales of Autos by Vespa took place in 2018 and all the other transactions in 2017 then GDP increase in 2017 will be $3 million and $2 million in 2018.