There are three firms in an economy: X, Y, and Z. Firm X buys $200 worth of goods from firm Y and $300 worth goods from firm Z; and produces 250 units of output at $4 per unit. Firm Y buys $150 worth goods from firm X, and $250 worth goods form firm Z; and produces 300 units of output at $6 per unit. Firm Z buys $75 worth goods from X, and $50 worth goods from firm Y; and produces 500 units at $2 per unit. Given this information, what is the economy's GDP?

Answer: $2,775

Explanation:

Total Value of goods sold by X:

= X sells to Y + X sells to Z

= $150 + $75

= $225

Total Value of goods sold by Y:

= Y sells to X + Y sells to Z

= $200 + $50

= $250

Total Value of goods sold by Z:

= Z sells to X + Z sells to Y

= $300 + $250

= $550

Value of goods produced by X = units of output * cost per unit

= 250 units * $4

= $1,000

Value of goods produced by Y = units of output * cost per unit

= 300 units * $6

= $1,800

Value of goods produced by Z = units of output * cost per unit

= 500 units * $2

= $1,000

GDP using the value added approach:

= [Goods produced by X - VA by X] + [Goods produced by Y - VA by Y] + [Goods produced by Z - VA by Z]

= [$1,000 - $225] + [$1,800 - $250] + [$1,000 - $550]

= $775 + $1,550 + $450

= $2,775