One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for $3.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP? a. GDP increases by $2.00. b. GDP increases by $3.00. c. GDP increases by $5.00. d. GDP increases by $6.00.

Taking these three transactions into account, what is the effect on GDP?

c. GDP increases by $5.00

Explanation:

The Gross Domestic product usually abbreviated as the GDP, is a measure of how much a goods and services a country can produce during a particular time period. The quantity of goods and service is usually expressed in monetary terms. it serves a a broad measure of a country's overall economic status. A higher GDP usually implies that the quantity of goods and services being produced in monetary terms is very high, there for it can be concluded that the general health of the economy is good.

To determine the GDP in our case, we need to determine the total value of a finished product to determine how much the GDP changes. The intermediate good is not included since it is not sold as a finished product but as a raw material in the production of a finished product. The following commodities are sold as finished products, for example; the bread and the second bag of floor. The change on GDP is as follows;

Change in GDP=Final GDP-initial GDP

where;

Change in GDP=unknown, to be determined

Final GDP=0+3+2=$5.00

initial GDP=assumed to be 0

replacing;

Change in GDP=5-0=$5.00

The effect on GDP is an increase of $5.00.