Consider a country with only three producers, x, y and z. Who produce ink, pen and paper. Y uses ink output of x in its production of pens. X produces 1,111 liters of ink monthly, Y produces 52,078 pens monthly, and Z produces 11 metric tons of paper monthly. X sells all of the ink it produces to Y at a market price of $386 per liter. Y sells 43,219 pens at a price of $0.79 per pen and stores the rest as inventory. Z sells all of its paper at the market price of $822 per metric ton. So the annual market value of productionin this economy is ?

The annual market value of production in this hypothetical economy is the market value of pens produced by Y and the papers produced by Z, excluding the market value of the inks by X, which is an intermediate product or input to Y's. The annual value is then derived as follows: market values of (X's output + Y's output + Z's output - X's output). This is simply equal to (Y's output + Z's output), i.e. {(52,078 x 12 x $0.79) + (11 x 12 x $822)} = $602,203.44.

Explanation:

This value is also called the GDP (Gross Domestic Product) using the production or output approach. There are two other approaches for calculating the GDP. They are the Expenditure or Spending approach and the Incomes approach. It is worthy of note to remember that the annual GDP is the total market value of goods and services produced within an economy within a year. It can also be adjusted for inflation and population in order to derive better insights. Generally, the GDP helps policy makers, investors, and business organisations to make strategic decisions.

Using the Production approach as in this case, the total value of economic output is obtained while the costs of intermediate goods (X's in Y's production) is deducted.