- [Instructor] In previous videos
we talk about GDP
as the market value of final goods and services
produced in a country in a given time period,
let's say in a given year
and we gave the example
of producing jeans where maybe the farmer helps produce
the cotton and then the thread maker
takes that cotton and makes thread
and then the fabric maker takes the thread
and makes fabric and then the jean maker
takes the fabric and produces jeans
and then the market value of those jeans was $50
and so, assuming all of this happened in one year,
in the time period that we're measuring GDP for,
then we would just count the $50,
if we're looking at the final market value
or the market value of final goods and services.
You would say the GDP for at least for this component
of the GDP from these jeans is $50
but I do wanna clarify
that there are multiple ways
that you can measure GDP
and you could even think about it
from a value added approach
but the key idea is no matter how you measure it
you should get to the same value,
so let's think about the various actors here
and what their value add was.
So, first, let's think about the framer right over here.
So, this is the farmer,
my not so elegantly drawn rectangle
around what he's doing.
So, the farmer's value add is what?
Well, before you just had some dirt
and things and so, maybe you could say
that the market value was zero
and then he's able to produce something
or she's able to produce something
that now has a market value of $10,
so their value add is $10.
Now, from there, the cotton goes to the thread maker.
The threader maker they take that $10 cotton,
so this is thread maker,
they take the $10 cotton
and are able to produce $20 worth of thread?
What is their value add?
Value add here?
Well, they took something worth $10
and they were able to do something to it
to make it worth $20,
so their value add is now another $10
and then, this is the thread maker,
and then from there it goes to the fabric maker
and I think you see where this is going,
the fabric maker is this part
of our process,
fabric maker
and their value add is what?
Pause this video and think about it.
Well, they take something worth $20
and they're to turn it into something
that has a market value of $30,
so their value add is also $10
and then last but not least,
you have the jean company,
so the jean manufacturer,
I'll call them the jean producer,
the jean producer, they take something
that has a market value of $30
and they're able to sell it for $50,
so their value add here,
if you take something for 30 and you make it worth 50,
then you've added $20 of value
and so, the value added approach to GDP
will just sum up these value adds,
so this is going to be this $10 from the farmer
plus the value add of the thread maker,
plus $10 from the thread maker
plus $10 from the fabric maker
plus $20
from the jean maker
and what will that all add up to?
Well, that's all going to add up to 10 plus 10 is 20
plus 10 is 30 plus 20 is $50
and lucky for us that is added up to the same amount
as we had before where we just looked
at the market value of the final goods and services.
Now, one benefit of the value added approach
is that real supply chains are quite complex
and things might be going from one country
to another, they might as we've talked about
in another video, the year might end right over here
and so, when something is made in China
and there's value add in China
but then it's shipped to the US
and some value add is placed on it
and then it's shipped back to China or Mexico,
you have to be careful
to only count the value add in the country
for which you are measuring the GDP.
So, that's one useful way or one useful reason,
or one way in which the value added approach
might be useful.
The key idea though is that you're getting
to the same value.
You should get to the same value
as the market value of the final goods and services
produced in a given time period.