Consider an economy that consists only of those who bake bread and those who produce its ingredients. Suppose that this economy's production is as follows: 1 million loaves of bread (sold at $2 each); 1.2 million pounds of flour (sold at $1 per pound); and 100,000 pounds each of yeast, sugar, and salt (all sold at $1 per pound). The flour, yeast, sugar, and salt are sold only to bakers, who use them exclusively for the purpose of making bread.
a. What is the value of output in this economy (i.e., nominal GDP)?
b. How much value is added to the flour, yeast, sugar, and salt when the bakers turn them into bread