In this article, we would cover the Production Approach to Measure GDP. In all, there are three ways to measure GDP –
- Expenditure Approach,
- Production Approach and,
- Income Approach.
We have already covered the Expenditure Approach to Measure GDP. The production approach deals with final goods and services produced in the economy. We can estimate GDP by calculating the total value of goods and services produced in the economy in a certain time period.
Production Approach to Measure GDP
Here, with the value of goods and services – we need to multiply the goods and services produced by their market value and then add each of those results. This will help us arrive at the final GDP figure. We understand it with the following example.
Let’s say, we have x and y quantity of goods produced whose market value is A and B respectively. So, to calculate GDP –
GDP = (x*A) + (y*B)
It may seem pretty easy as of now. But, in real life, it’s not that simple. We have just provided you with the basic idea behind it. There would still be many goods and services in the economy which we can’t calculate for various reasons.
It is worth mentioning here that, we use the final value of goods and services produced to calculate GDP. We don’t include the intermediate goods here just to avoid double counting. For instance, we use the market value of an Air conditioner. It includes the value of all the components inside. We don’t calculate the value of components of the Air conditioner separately and then again add those with the value of an Air Conditioner. If we did, we would count the value of components twice. So, to avoid double counting we just do the math for the final value of the Air conditioner.
And, how do we arrive at the final figure? By calculating the value added at each stage. So, we calculate the value added at each stage of making the component. So, when the final good is ready, it would include the value of all the components.
In conclusion, we covered Production Approach to Measure GDP here. In the next article, we cover the Income Approach to Measure GDP.
