Question

In a hypothetical economy, beer production begins in a farm, where a barley grower produces barley and sells it to the brewer at R 3/kg. The brewer then processes the barley and bottles the beer and sells it to the retailer at R 7/litre. The retailer then sells the bottled beer to the consumer at R 10/litre.

Using the above example of beer production, discuss the THREE (3) methods of calculating GDP in this economy assuming that 20 000 kg of barley were produced in 2019, and that one kilogram of barley produces 1 litre of beer.

Answer 1

GDP is the market value of all final goods and services produced in a country during a given period of time.

There are mainly three approaches to calculate GDP-

1) Output method-It focuses on finding the total output of a nation by directly finding the total value of all goods and services.Due to the various stages of production, only final value of goods and services are accounted in GDP instead of intermediate production value in order to avoid the problem of double counting.

GDP= value of output- intermediate consumption

2) Income approach- It is equal to the total factor income received by the residents of the nation.

GDP=Compensation of employees+Net interest + royalty and rental income+ business cash flow

3) Expenditure approach- It measures finding the total output of nation by finding the total amount of money spent.The components of GDP include - consumption,government spending , investment and net exports.

GDP=C+I+G+NX

=C+I +G+ (X-M)

Where X= Exports, M= imports,C = consumption spending,I =investment spending, G =government spending

In this question, we use output method to calculate GDP

Here value of GDP is the final value of beer sold to customers which is at Rs 10/litres

That is 20000 litres×10= Rs 200000

Value added at each stage of production is

Barley grower sells to brewer= Rs 3 × 20000kg=Rs 60000

Brewer sells to retailer= Rs 7 ×20000 litre= Rs 140000

Value added here= 140000-60000= Rs 80000

Retailer sells to customer = Rs 10× 20000= Rs 200000(final value of beer )

Value added here=200000- 80000= Rs 120000

Therefore this example uses output approach to measure GDP.