Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Grasping the Idea of GDP

As of 2015, the UK’s GDP is more than £1.5 trillion (that’s £1,500 billion or £1,500,000 million): basically, it’s an awful lot of lolly.

In practice, if you add up the value of everything produced in the UK in one year it comes to more than £1.5 trillion. But note this important point: to avoid double counting, economists count only the value of final goods produced, not intermediate goods. So if a car manufacturer produces a car worth £20,000 but uses parts worth £8,000 to physically make the car, the total addition to GDP is just the final £20,000.

In this section we describe a few of the ways in which economists view GDP.

Adding up total value added


Sometimes you hear people calling GDP the total value added. They do so because you can think of the contribution of a good or service to GDP as the value that is added to it at each stage of production.

For example, the car manufacturer we mention has added value worth

£12,000 (by buying the parts for £8,000 and then selling the car for £12,000 more). The same applies to the parts for which component manufacturers may have had to buy raw materials for £2,000 in order to produce the £8,000 worth of parts. They have then added value worth £6,000.

As Table 4-1 shows, the value of the car (the final good being produced) is £20,000. This is exactly equal to the total value added by the raw materials, the component manufacturer and the car manufacturer.


Table 4-1 Total Value Added


Cost of Inputs (£) Value of Output (£) Value Added (£)
Raw materials – 2,000 2,000

Component manufacturers 2,000 8,000 6,000

Car manufacturer	8,000	20,000		12,000
Total value added		–	–	20,000