A married couple living together own a small farm. They grow several crops, producing most of the food they consume and selling the excess for cash. With the increase in corn prices due to the rising demand for ethanol, they decide to stop producing vegetables and potatoes, and, instead, devote that land to growing more corn for sale. They use part of the additional cash they earn from greater corn production to buy vegetables and potatoes at the grocery. What effect does this have on GDP?

Question

Business

Pepper

30 April, 12:11

A married couple living together own a small farm. They grow several crops, producing most of the food they consume and selling the excess for cash. With the increase in corn prices due to the rising demand for ethanol, they decide to stop producing vegetables and potatoes, and, instead, devote that land to growing more corn for sale. They use part of the additional cash they earn from greater corn production to buy vegetables and potatoes at the grocery. What effect does this have on GDP?

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Answers (1)

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Soren Stokes · Answer 1

The GDP will increase.

Explanation:

In this scenario, the GDP will increase based on two different effects. The first one is that the GDP will increase as a result of the married couple buying their vegetables at market prices instead of consuming what they normally produce in the household which is not accounted for in the GDP analysis.

The second reason for the increase in GDP is the sale of growing MORE corn and selling at Market price as against what they normally use the small farm for which was growing various crops for their own consumption and only selling the excess which only contributed little to GDP relatively.