Suppose that furniture production encompasses the following stages: Stage 1: Trees are sold to lumber company. $1,000 Stage 2: Lumber is sold to furniture company. $2,000 Stage 3: Furniture company sells furniture to retail store. $6,000 Stage 4: Furniture store sells furniture to consumer. $10,000 (a) What is the value added at each stage?

(b) How much does this output contribute to GDP?

(c) How much would the output contribute to GDP if the lumber were imported from Canada

a)

The value added at each stage

Stage Value added ($)

1 1000

2 (2000-1000) = 1,000

3 (6,000 - 2000) = 4,000

4 (10,000 - 6,000) = 4,000

b)

The amount by GDP is increased = $10,000

c) Reduce GDP

Explanation:

Gross domestic product (GDP) which is the total market value of all the final goods and services produced in a country over a given period of time. The GDP can be calculated using the value added approach.

Here the GPD figure is ascertained by summing the amount of additional value created by each factor of production at each stage of the production process of the final product.

a)

The value added at each stage

Stage Value added ($)

1 1000

2 (2000-1000) = 1,000

3 (6,000 - 2000) = 4,000

4 (10,000 - 6,000) = 4,000

b)

The amount by GDP is increased = $10,000 which is the total value added or the market value of the final goods

c)

If the lumber were imported it would be deducted from the value of export and thus reduce GDP. Remember that GDP is the market value of all good and service produced within a given country over certain period of time.

(a)

Stage 1: $1,000

Stage 2: $1,000

Stage 3: $4,000

Stage 4: $4,000

b) $10,000

c) $8,000

Explanation:

(a) Value is added at each stage.

Stage 1: $1,000 (initial purchase)

Stage 2: $1,000 ($2,000 - $1,000)

Stage 3: $4,000 ($6,000 - $2,000)

Stage 4: $4,000 ($10,000 - $6,000)

(b) Addition of all the value added at each stage shows us that $10,000 was contributed to GDP which is said to be same as the final amount going to the producer.

(c) Since imports must be subtracted, therefore stages 3 and 4 definitely shows us that $8,000 would be contributed.