Fundamental terms - GDP

Question 1

3 approaches to calculate the GDP

Answer 1

1) Only final goods
2) Value added
3) Income approach

Question 2

Approach: only final good

Answer 2

GDP is based on the value of the final good, not the intermediate good
eg Revenues from sales of final good
eg steel = intermediate good
car = final good, so the revenue of the car sale is used

Question 3

Approach: value added

Answer 3

calculated by adding the value added at each stage of production
Value added = value of productions - the value of intermediate goods used in production
eg for the steel company it is 100€, because no intermediate goods are used, just raw inputs
For the car company the value added is the revenue from sales - the price of purchasing the intermediate good (steel) : 200-100= 100
So the total value added for both firms: 100+100=200

Question 4

Value added formula

Answer 4

Value added = value of productions - the value of intermediate goods used in production

Question 5

Approach: Income approach

Answer 5

GDP is calculated by adding up all income earned from production (wages & profits)
Income approach = profits + wages
eg the steel company: wages (80) + profit (20) = 100
car company: wages (70) + profit (30) = 100
in total: 100+100

Question 6

income approach formula

Answer 6

Income approach = profits + wages