does gdp measure the net value added by an economy… Or is it a measure of the value of final goods and services produced by the economy.?
I see both definitions in schweser… Could anyone clarify?
thanks!
not sure what you mean by top or bottom line, but gdp is the total value of production, thus the name “gross” domestic product, instead of, say, “net” or “operating”.
“bottom line” = net profit on the income statement “top line” = sales/revenue on the income statement (and GDP) Never heard sales or GDP referred to as “top line”, but the analogy works…
Net Value Added & Value of Final Goods/Services
Both definitions are correct.
For simplicification purposes, let’s assume there are only two companies in the economy (Companies A and B) and four people (Jane, John, Susan and William). Jane owns 100% of Company A, and John works for her. Susan owns 100% of Company B, and William works for her.
During the year, Company A produces $50 worth of some intermediate goods that Company B needs for its production of final goods. The only input needed by Company A is John’s labor, and Jane pays him $30 for his work.
Now, with this $50 worth of intermediate goods and William’s labor (for which he’s paid $30), Company B produces some final goods worth $100, and sells them to the final users.
At year end, the two companies report the following income statements:
Company A Company B Revenues 50 100 Expenses 30 80 Net Income 20 20 Now, for the calculation of GDP:
1) Value of Final Goods: $100 = the value of final goods that Company B produced and sold to the final users.
A caveat: you only add up the top lines of the FINAL GOODS producers.
2) Net Value Added by Factors of Production: $30 (Value added/earned by John’s labor) + $20 (by Jane’s capital) + 30 (by William’s labor) + 20 (by Susan’s capital) = $100
A caveat: you add up the bottom lines of all factors of production (i.e., capital, labor, and land): the bottom lines of the two companies (capital) and the two employees (labor).