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Would revenues be a good proxy variable? If not, what are the other proxy variables that I can use?

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    $\begingroup$ Revenue would definitely not work in the general case; you need to look at the value-added. For example, a distributor may buy goods and sell them on to other businesses. Its value added will be a small fraction of its total sales (revenues). $\endgroup$ – Brian Romanchuk Jul 29 '17 at 1:42
  • $\begingroup$ This is a question: Do you still have to add profit before tax if this is negative (that is "loss before tax"). More so when the company has not tax compensation on losses? $\endgroup$ – Solomon K. Odonkor Aug 15 at 0:40
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As a comment noted, value-added is the way to go. And how do we measure value added at the level of an individual firm?

It is

$$\text{Value-added} = \text{Wages and Salaries incl. Insurance}+\text{Depreciation}+\text{Profits before Taxes}$$

"Wages and Salaries including social security fees" is the reward of Labor, while "Depreciation plus Profits before Taxes" is the (gross) reward of Capital.

This makes sense because if one views GDP from the "income" angle, it goes to these two aggregates of productive inputs, "Labor" and "Capital".

All other expenses that appear in a company's Profit & Loss Statement are "third-party costs", or value that other productive entities create.

Depending also on the jurisidiction, in most cases Labor costs, Depreciation and Profits before Taxes can be found as separate items in the financial statements of a company.

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  • $\begingroup$ Does depreciation here represent the firm's spending on long-term assets, such as machinery, equipment, etc? Also in this approach, is it relevant whether the firm exports the final product or not and whether the firm imports raw materials or the equipment? Finally, is there a book with this equation that I can use for reference? Sorry for the long series of questions, I very much appreciate your time and effort. $\endgroup$ – Arthur Tarasov Feb 28 at 3:15
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    $\begingroup$ @ArthurTarasov Depreciation is not spending but the estimated value of fixed assets that "leaves" the assets and goes into the produced goods per period (spending would be the Investment, not depreciation). No, whether the firm exports or imports does not matter.The criterion for GDP is where something is produced, not where it is consumed, or whence the inputs came. This formula is so old and standard, that really no textbook comes to mind. $\endgroup$ – Alecos Papadopoulos Feb 28 at 3:45
  • $\begingroup$ Thank you very much! At the point when I want my students to use this formula, they will not be familiar with the concept of depreciation so I need to explain it to them in familiar words $\endgroup$ – Arthur Tarasov Feb 28 at 3:54

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