In the output approach, GDP is the value of all final goods and services produced in an economy over a period of time. That is one method to measure GDP, the other is:
- GDP expenditure approach
- GDP income approach
All three should produce the same number. Like the circular flow model, all three measure the same metric.
Calculation and examples of output approach GDP
Under this approach, calculations only use the value of final goods and services. There are a few notes to remember:
- The calculation uses only final goods and services
- The value of semi-finished goods is excluded
All added value during the production process is reflected in the selling price of the final goods produced. So, when you sum the value of a semi-finished item, it will result in double counting.
Alternatively, you can calculate it by summing the value-added at each stage of the production and distribution process. Value added is the price of output minus the input costs consumed in the production process.
I will take a simple example. Assume, GDP consists only of clothing products. Say, clothing production only requires cotton, yarn, and fabric as input. The following are the values for each item:
|Item||Final value (USD)||Value added (USD)|
As the definition, GDP includes only the market value of clothing, not the final value of each input. Hence, GDP is equal to USD80. To get that number, we can also add up the added value of each production process = 40 + 10 + 10 + 20.
Imagine if we used the final value of all inputs, GDP would be equal to Rp230. That’s far above the actual GDP. This double-counting occurs because each product’s value includes the market value of the goods of the previous supply chains.
From the data, you can see. The market value of the fabric is Rp 60. This figure contains a yarn market value of Rp50 as input costs for fabric. In fact, the efforts of fabric producers only produce an amount of Rp10.