Use the concept of value added to explain the following: You buy a pair of jeans...
Use the concept of value added to explain the following: You buy a pair of jeans at your local store for $50 and your transaction contributes $50 to GDP. Someone else purchases an identical pair of jean online for $40 and their transaction contributes $40 to GDP.
Homework Answers
ANSWER:
Gross Domestic Product (GDP) can be defined in two ways. One is, the monetary value of the final goods and services produced in a given financial year within the periphery of a country. And the other definition is, the sum of all the value added in a given financial year within the economy.
And, Value added = (Total Production – Intermediate Goods)
In the given question, the Value added = ($50+$40) = $90. Total value added in the economy is $90.
In the given question, no intermediate good is mentioned. So, the amount is not deducted from the total. For e.g., if it is said that an XYZ brand bought clothing fabrics worth $20 from a firm and made revenues from sales worth $100. The clothing fabric firm had total revenue generated of $20 from sales. Suppose that the economy consists of only these two firms.
Then, the total value added would be = (the value added by the XYZ brand + the value added by the clothing fabric firm)
The value added by the XYZ brand = (total production – intermediate goods) = ($100 - $20) =$80
The value added by the clothing fabric firm = (total production – intermediate goods) = ($20 + $0) = $20
Therefore in this case, the total value added = ($80 + $20) = $100
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