The table below shows the price of inputs and the price of outputs at each step
ID: 1188714 • Letter: T
Question
The table below shows the price of inputs and the price of outputs at each step in the production process of making a shirt. Assume that each of these steps takes place within the country.
a. Using the standard expenditure method, the total contribution of this shirt to GDP is $_____.
b. If we use a value-added method (i.e., summing the value-added by producers at each step of the production process, equal to the price of inputs minus the price of outputs), the contribution of this shirt to GDP is $_____.
c. If we mistakenly added the price of both intermediate and final outputs without adjusting for value-added, we would find that this shirt contributes $_____ to GDP and this overestimates the true contribution by $_____.
Cotton farmer Fabric maker Sewing and printing Inputs $0 $1.10 $3.50 Value of output $1.10 $3.50 $18.00Explanation / Answer
a. Using the standard expenditure method, the total contribution of this shirt to GDP is $18.
b. The cotton farmer’s contribution is $1.10 $0, or $1.10. The fabric maker’s contribution is $3.50 $1.10, or $2.40. The sewer and printer’s contribution is $18.00 $3.50, or $14.50. Using the value-added method (i.e., summing the value-added by producers at each step of the production process, equal to the price of inputs minus the price of outputs) the total contribution of this shirt to GDP is the sum of these three values-added: $1.10 + $2.40 + $14.50 = $18.00.
c. If we add the totals at each step we wind up with $1.10 + $3.50 + $18.00, or $22.60 in total production: an overestimate of $4.60
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