Question

The island of Sodor is a small country with only two sectors: wood and furniture. This year, the total revenue of the wood sector is £3 billion, where £2 billion comes from sales to the furniture sector and the rest from sales to consumer. All the output of the furniture sector is bought by consumers at £5 billion. What is the GDP of Sodor?

a) It is £6 billion according to the Expenditure Approach
b) It is £7 billion according to the Income Approach
c) It is £8 billion according to the Production Approach
d) Not enough information

Explain your answer.

Answer 1

The revenue from the wood sector can be divided into two parts- the revenue from consumer purchases and the revenue from furniture sector's purchases.

Given that out of £3 billion, £2 billion comes from sales to the furniture sector, we can conclude that this £2 billion is intermediate consumption and not the final consumption. Intermediate consumption is not included in the GDP. The final consumption is only that which is done by consumers not for the purpose of resale or value addition.

Thus, the revenue from wood sector that will be included in GDP is only £1 billion.

Secondly, the output of the furniture sector is bought by consumers at £5 billion.

Thus, the GDP for the island of Sodar = £1 billion + £5 billion = £6 billion. Thus, option A is correct.