Measuring GDP Output and Valueadded Approach

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Transcript: • 1 Looking at the Circular Flow of Income, • 1 We see that stuff just gets transformed in different stages. • 1 Firms use factors of production from households, • 1 Perform some magic, • 1 And Tada! You get goods and services • 1 These are sold back to households. • 1 Households pay for these stuff too, • 1 Which reflects the value of these goods. • • • 2 So this arrow, the National Expenditure, • 3 And this arrow, the National Output. • 4 Should be roughly equivalent. • 5 Because when firms sell goods to households, • 6 It's just goods transformed into money • • • 7 Hey, where does all this money on spending come from? • 8 It comes from income made by the households. • 9 So this arrow, the national income, • 10 also equals to national expenditure. • 11 We see that National Income = National Expenditure = National Output. • They are just in different stages of the Circular Flow of Income. • • • 12 So how do we measure GDP? • 13 We can measure the total output, the total final goods and services. • 14 Why only final goods and services? • 15 Take the production of sandwiches for example. • 16 First, we need labor • 17 to harvest wheat, • 18 then wheat goes into the production of flour. • 19 Flour goes into the production of bread, • 20 And bread goes into the production of sandwiches. • 21 We then sell the sandwich at $5. • 22 Tada! GDP equals to $5. • 23 This $5 already includes the value of labor, flour, wheat and bread • • 24 that went into the production of sandwich. • 24 We don't have to add these things again. • 25 See, if you add the value of these things, • 25 On top of the sandwich, • (1 + 2 + 3 + 4 + 5 = 15 ) • 26 It's $15, way higher than $5. • 27 Because you've double-counted, and it's wrong. • • • 28 Alternatively, we can use the value-added approach • 28 We measure the additional value that is created in every stage of production. • We start from zero. • Labor doesn't require any other input. • So labor itself is pure value. • Using this labor, we grow wheat. • Wheat is sold at $2. What is the additional value created? • Remember we got to minus the cost of production which is labor. • So $2 - $1 = $1 • $1 of additional value created. • • Using wheat, we make flour. • Flour is sold at $3. • What is the additional value created? • We got to minus the cost of production which is wheat. • $3 - $2 = $1 • $1 of additional value created. • • • Do the same for the rest • Bread adds value to flour. • And sandwich adds value to bread. • Add up all the additional value created by each stage of production, • We get $5 as well. Wow! • • 29 You see, Output approach and value-added approach are quite similar. • 29 In value-added approach, you add up all the additional value • 30 Which is just the value of the final output. • • • 31 Hey, that's not the only way to measure GDP… • 31 If you like this video, remember to like and subscribe. • 32 Next up: measuring GDP: Expenditure and Income Approach. • • _____________________________________________________ • • How do we measure the size of the economy? We can calculate the total output produced. • Why do we only count FINAL goods and services towards gross domestic product (GDP)? What's double-counting? What is the difference between intermediate goods and final goods? • Important definitions: • Gross Domestic Product or GDP is the total value of all final goods and services produced within the borders of a country during a given period. • Use flashcards to remember these definitions: • http://www.memrise.com/course/461808/...

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