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Main content
Current time:0:00Total duration:5:16
MEA‑1 (EU)
MEA‑1.A (LO)
MEA‑1.A.3 (EK)

Video transcript

in previous videos we talked 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 that the the thread and makes fabric and then the jean maker takes the fabric and produces jeans and sew and then there 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 from king 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 want to clarify that there are multiple ways that you could measure GDP and you could even think about it from a value-added 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 farmer right over here so this is the farmer am I not so elegantly drawn to rectangle around what he's doing so the farmers value add value add is what well before you just had some dirt and 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 ten dollars so their value add is ten dollars now from there the cotton goes to the thread maker the thread maker they take that $10 cotton so this is thread thread maker they take the $10 cotton and are able to produce 20 worth of thread what is their value add value and here well they took something worth $10 and they were able to do something to it to make it work 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 the fabric maker and I think you see where this is going the fabric maker is this part of our process fabric fabric maker and their value add is what pause this video and think about it well they take something worth $20 and they were able to create it they're able to turn 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 value add here if you take something from 30 and you make it worth 50 then you've added $20 a 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 plus $10 from the fabric maker plus $20 plus $20 from the Jean maker and what will add all that 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 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 of 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