Answer to Question #92966 in Macroeconomics for Nandy

Question

I have studied these 1) Gross value added= value of output- intermediate consumption. 2) Net value added= gross value added- depreciation. But how could we say "Net value added = Gross value of output – Value of intermediate consumption"? This formula from the source I have underlined. Source: https://courses.lumenlearning.com/boundless-economics/chapter/measuring-output-using-gdp/

Answer 1

I will add explanatory comments to the formulas:

1) Gross value added = value of output- intermediate consumption.

In Formula 1, intermediate consumption means value of goods consumed, excluding consumption of fixed capital

2) Net value added= gross value added- depreciation.

In Formula 2, depreciation means consumption of fixed capital.

3) Net value added = Gross value of output – Value of intermediate consumption.

In Formula 3, Value of intermediate consumption = value of goods consumed + consumption of fixed capital.

So, Net value added = Gross value of output - value of goods consumed - consumption of fixed capital.