Methods of Calculating GDP

Within the expenditure approach, there are two approaches:

Sum-of-value-added Approach

Under this approach, GDP is calculated as the sum of value added at each stage of production and distribution. For example, suppose the raw material was worth $100, it was processed and converted into semi-finished goods worth $120. Then these semi-finished goods are converted into finished goods worth $150. The same product is sold in retail at $180. The sum-of-value-added approach calculates the total value as follows:

StageSale ValueValue Added
Raw Material$100$100
Semi-finished Goods$120$20
Finished Goods$150$30
Sum of Value Added$180

Value-of-final-output Approach

Under this approach, GDP is calculated by summing the values of final goods and services produced during the period. In the above example, we will directly take the value $180 of the product.

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