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Actually, if I am not mistaken Gross Value Added is a little easier to understand than GDP.

Suppose you just take the prices and quantities of all goods and services exchanged over a reference period within a reference region, and add them up. The problem with that is that tehre is double-counting. If I produce a piece of cloth and sell it to you for 100 and you make a shirt out of it and sell it on for 150, the sum of the exchange values is 250, but the 100 of materials is double-counted.  So, you can do one of two things. Either you only count the goods and services purchased for comnsumption (i.e., that don't get used to produce something else that is then sold) or you consider the value added which is 100 for me, but 50 for you.

So each transaction has a price, but also a value added which is the price minus the cost of all the inputs that were used in producing the good or service traded.

So you tally not price and volume traded, but value added and volume traded. That is GVA.

GDP requires you to subtract imports, add exports, and so on, so it is not quite as simple to understand as "just tally everything and add it up".

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Mon Jan 14th, 2008 at 01:47:32 PM EST
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