True or False: The total value added for the three producers in this economy does not equal the economy’s GDP
The correct answer and explanation is:
False.
In an economy, the total value added by the producers does equal the Gross Domestic Product (GDP). To understand why this is true, it is important to grasp the concept of value-added and how GDP is calculated. The value-added approach to calculating GDP measures the contribution of each producer to the economy’s output.
In this method, the value added by each producer is determined by subtracting the cost of intermediate goods (raw materials, parts, etc.) from the revenue generated from sales of final goods. This ensures that the same product is not counted multiple times in the GDP calculation. Each producer in the economy contributes to the overall GDP through their value-added activities, which are the final outputs of goods and services after accounting for any costs of production.
When summing the value added by all producers in the economy, it equals the total value of goods and services produced, which is GDP. This is because GDP is the total monetary value of all final goods and services produced within a country during a given period. Whether calculated using the income approach, the expenditure approach, or the value-added approach, the result should be the same.
Therefore, in a closed economy with three producers, if you sum the value-added by each producer, the result will be equal to the overall GDP of that economy. This helps avoid double counting and ensures that GDP accurately reflects the true output of the economy.