With aid of example below, use production method to calculate GDP:
Suppose a farmer produces 100 bags of wheat, using only his own labor, seed, and fertilizers
on a smallholding which he rent. Hesells the wheat to a miller for 1000 and pays 500 rents
in theowner of the land. His net income or profit is therefore 500. The miller buys the wheat
and produce 200 kgs of flourwhich he sells to a baker for 3000. His production costs are
1000 forlabour (wages)and 500 for overheads (interests and rental, or other charges),which
leaves a profit of 500,the barker produce 1000 loaves of bread with the flour, which he sells
directly to the consumers for 5000. His labour cost is 750and his overheads amounts to 400,
which means that his profit is 850.
To calculate GDP using the production method, we need to consider the value added at each stage of production. Value added refers to the increase in the market value of a good or service at each stage of production.
In this example, let's break down the production process and calculate the GDP:
1. Farmer's production:
- The farmer produces 100 bags of wheat, which he sells to the miller for $1000.
- The value added by the farmer is $1000 (revenue from selling wheat).
2. Miller's production:
- The miller buys the wheat for $1000 and produces 200 kg of flour.
- The value added by the miller is $2000 ($3000 revenue from selling flour - $1000 cost of wheat).
3. Baker's production:
- The baker buys the flour for $3000 and produces 1000 loaves of bread.
- The value added by the baker is $2000 ($5000 revenue from selling bread - $3000 cost of flour).
Therefore, the GDP in this example can be calculated by adding up the value added at each stage of production:
GDP = Value added by the farmer + Value added by the miller + Value added by the baker
= $1000 + $2000 + $2000
= $5000
Hence, the GDP in this example is $5000.