Why the approach used in calculating total value added was incorrect?
Explanation of Solution
GDP is the value of final goods and services produced in a nation in a given financial year. The calculation of GDP doesn’t include the value of intermediate goods.
In the given figure, the price of a car includes the costs of intermediate goods such as steel (worth $4800) and iron ore (worth $4200). If the calculation of GDP includes the value of intermediate goods and the value of final goods, then it will generate a double counting problem, which means estimating the value of a single product twice in the calculation of GDP.
Value of intermediate products:
As given in the figure,
Thus, it would be incorrect to calculate the total value added as $30,500 as it represents the worth of both the final good (a car) and the intermediate good (steel).
Chapter 10 Solutions
Krugman's Economics For The Ap® Course
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