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Measuring GDP: Output and Value-added Approach - YouTube
Channel: Economics Mafia
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Looking at the Circular Flow of Income
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We see that stuff just gets transformed in different stages
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Firms use factors of production from households
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Perform some magic
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And Tada!
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You get goods and services
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These are sold back to households
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Households pay for these stuff too
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Which reflects the value of these goods
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So this arrow, the National Expenditure
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And this arrow, the National Output
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Should be roughly equivalent
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Because when firms sell goods to households
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It's just goods transformed into money
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Hey, where does all this money on spending come from?
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It comes from income made by the households
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So this arrow, the national income
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also equals to national expenditure
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We see that
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National Income = National Expenditure = National Output
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They are just in different stages of the Circular Flow of Income
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So how do we measure GDP?
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We can measure the total output, the total final goods and services.
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Why only final goods and services?
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Take the production of sandwiches for example
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First, we need labor
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to harvest wheat
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then wheat goes into the production of flour
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Flour goes into the production of bread
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And bread goes into the production of sandwiches
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We then sell the sandwich at $5
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Tada! GDP equals to $5
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This $5 already includes the value of labor, wheat, flour and bread
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that went into the production of sandwich
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We don't have to add these things again
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See, if you add the value of these things
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On top of the sandwich
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It's $15, way higher than $5
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Because you've double-counted, and it's wrong
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Alternatively, we can use the value-added approach
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We measure the additional value
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that is created in every stage of production
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We start from zero
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Labor doesn't require any other input
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So labor itself is pure value
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Using this labor
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we grow wheat
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Wheat is sold at $2
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What is the additional value created?
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Remember we got to minus the cost of production
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which is labor
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$2 - $1 = $1
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$1 of additional value created
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Using wheat
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we make flour
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Flour is sold at $3
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What is the additional value created?
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We got to minus the cost of production
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which is wheat
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$3 - $2 = $1
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$1 of additional value created
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Do the same for the rest
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Bread adds value to flour
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And sandwich adds value to bread
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Add up all the additional value
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created by each stage of production
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We get $5 as well
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Wow
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You see
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Output approach and value-added approach are quite similar
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In value-added approach
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you add up all the additional value
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Which is just the value of the final output
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Hey, that's not the only way to measure GDP…
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If you like this video
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remember to like and subscribe.
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Next up
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measuring GDP: Expenditure and Income Approach
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