# How to calculate change in GDP using valued added?

Suppose that Roots buys 5 million dollars in leather produced this year in Alberta and 1 million dollars in zippers produced last year in Toronto to make 9 million dollars worth of leather jackets in Montreal this year. They sell 7 million dollars worth of jackets this year. What is the total contribution to Canadian GDP this year contained in these jackets? (million means million dollars)

A) 5 million B) 6 million C) 7 million D) 8 million E) 9 million

Here the answer is D), which I don't quite understand. We calculate contribution to GDP through value added. In my opinion, the final sale, which is 7 million dollars, should be the sum. Could someone explain?

## 1 Answer

You're dismissing the value added by the companies producing the leather and the zippers. The value added method calculates the total value added to goods and services at each step of production.

The value added by Roots is 9-5-1=3 (total value of final products - value of resources) and then you add the value of produced leather in Alberta (5) and zippers in Toronto (1).

3 + 5 + 1 = 9.

All produced goods and services are accounted for with this method, not just the ones sold to consumers (the jackets were produced even if they weren't sold), so the 7 million figure is irrelevant in this.

• But the answer says it's 8 million. Do you know why? – 1412 Mar 31 '16 at 13:25
• The original question might actually refer to the output approach (gross value of sold goods - value of intermediate goods) and considers leather to be a resource rather than a refined product and zippers as a final product? In that case you should sum 7 + 5 + 1 = 13 and the subtract 5 => 8. The question does seem poorly formulated as it's not clear on what are intermediate goods. In actual GDP calculations it is very strictly refined which goods fall under which categories. – John L. Apr 1 '16 at 6:50