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Chapter 6: Problem 12

What are the main components of measuring GDP with what is produced?

Short Answer

Expert verified
The main components of measuring GDP with the production approach are Agriculture, Forestry, and Fishing; Industry (including manufacturing, mining, and construction); and Services (including retail, finance, real estate, healthcare, and government). To calculate GDP using this approach, first calculate the value-added for each industry by subtracting intermediate consumption from total sales. Then, sum up the value-added across all industries to find the total GDP. For example, if Agriculture contributes $100,000, Industry contributes $700,000, and Services contribute $900,000, the total GDP using the production approach would be \(1,700,000\).

Step by step solution

01

Calculate the value-added for each industry

For each industry that operates within the country, we need to calculate the value-added it produces. To do this, we start with the total sales or receipts from each industry and subtract the cost of intermediate goods and services consumed. To illustrate this, imagine a car manufacturing industry which produces cars worth \(1 million and consumes goods and services like raw materials and electricity worth \)300,000. The value-added for this industry would be: Value-added = Total Sales - Intermediate Consumption Value-added = \(1,000,000 - \)300,000 = $700,000 Do this calculation for all industries, such as agriculture, industry, and services.
02

Sum up the value-added across all industries

Once we have calculated the value-added of each industry, the next step is to sum them. Following our example, let's assume we had these calculations for the three industries: - Agriculture, Forestry, and Fishing: $100,000 - Industry: $700,000 - Services: $900,000 Total GDP (production approach) = Sum of value-added across all industries
03

Calculate the total GDP using the production approach

Now that we have summed up the value-added for each industry, we can calculate the total GDP by using the production approach. In our example, we have: Total GDP (production approach) = \(100,000 + \)700,000 + \(900,000 = \)1,700,000 So, in this case, the total GDP for the country using the production approach is $1,700,000. Keep in mind that these numbers are very simplified for the purpose of illustration. In practice, you would have many more industries and categories to consider and much larger numbers to work with.

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Most popular questions from this chapter

Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living. a. The environment becomes dirtier b. The crime rate declines c. A greater variety of goods become available to consumers d. Infant mortality declines

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