Definition
GDP is the money value of all the activities performed in a country during a single year. These activities can be divided into two areas:
- Production of goods
- Provision of services.
The Difference Between Total Sales and Added Value
The added value is the amount that a country produces or creates by itself, out of its total sales.
Added Value of the Firm
A firm is a company that conducts some type of economic activity. The added value of a firm is the monetary value of its sales, minus the value of the materials it buys from local companies or companies in other countries.
Example 1
The added value of Furniture Ltd. is calculated as follows:
Total sales: $100,000
Local purchases: ($15,000)
Foreign purchases: ($30,000)
Total purchases: ($45,000)
Added value (sales minus purchases): $55,000
Example 2
Calculation of GDP for a country without economic links to other nations.
Assume that Country A has two factories:
-
A flourmill
-
A bread bakery
These two factories buy nothing that has been produced outside of Country A; and they produce everything that Country A uses. The bakery buys its flour from the mill, and the mill sells all of the flour that it produces to the bakery. Each factory employs 10 workers, and every worker earns $100 daily. The table on the next slide shows the situation at the two factories. Like all of the tables in this chapter (unless otherwise noted), this table concerns a time period of one year.
Table 4.1- Added Value
|
|
|
Flour Mill |
Bakery |
Total |
|
|
Column 1 |
Column 2 |
Column 3 |
Column 4 |
|
Revenue |
Annual production |
1,000 kg flour |
1,000 loaves of bread |
|
|
Price per unit |
$1 per kg |
$2 per loaf |
|
|
|
Total revenue |
$1,000 |
$2,000 |
$3,000 |
|
|
Expenses |
Purchases |
0 |
$1,000 |
$1,000 |
|
Salaries |
$1,000 (10 workers, $100 a worker) |
$1,000 (10 workers, $100 a worker) |
$2,000 |
|
|
Total Expenses |
$1,000 |
$2,000 |
$3,000 |
|
|
Profit |
|
0 |
0 |
0 |
|
Added value (revenues minus expenses) |
$1,000 |
$1,000 |
$2,000 |
|
