“Value Added” in the Lower Loop

who is being trained to make COP measurements , might be puzzled, saying: I can see that, if you are careful, your upper-loop product approach to GDP will avoid including intermediate products. But aren’t you in some trouble when you use the lower-loop cost or earnings approach.

After all, when we gather income statements from the accounts of firms, won’t we pick up what grain merchants pay to wheat farmers, what bakers pay to grain merchants, and what grocers pay to bakers? Won’t this result in double or even triple counting of items going through several productive stages?

Table 21-2 uses the stages of bread production to illustrate how careful adherence to the value-added approach enables us to subtract purchases of intermediate goods that show up in the income statements millers, bakers, and grocers. The final calculation shows the desired equality between (1) final sales of bread and (2) total earnings, calculated as the sum of all values added in all the different stages of bread production.

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