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Difficulty: EasyOutput (Value Added) Method of Measurement

A logging firm extracts raw timber worth ₦200,000\text{₦}200,000 and sells it to a sawmill. The sawmill processes the timber into wooden planks and sells them to a construction company for ₦350,000\text{₦}350,000. What is the total value added contributed to Gross Domestic Product (GDP) by these two stages of production?

  1. ₦350,000\text{₦}350,000Answer
  2. B
    ₦550,000\text{₦}550,000
  3. C
    ₦150,000\text{₦}150,000
  4. D
    ₦200,000\text{₦}200,000

Answer

The total value added contributed to GDP by the two stages of production is ₦350,000\text{₦}350,000.
Under the output (value added) method of national income measurement, GDP is calculated by summing the net value added at each stage of production. The logging firm adds ₦200,000\text{₦}200,000 and the sawmill adds ₦150,000\text{₦}150,000 (₦350,000−₦200,000\text{₦}350,000 - \text{₦}200,000). Summing these gives a total contribution to GDP of ₦350,000\text{₦}350,000, which is also equivalent to the value of final output.

Step-by-Step Solution

1
Calculate the value added by the logging firm.
Value Added (Logging) = ₦200,000−₦0=₦200,000\text{₦}200,000 - \text{₦}0 = \text{₦}200,000
The raw timber is harvested without prior purchased intermediate inputs, so its full sales value is value added.
2
Calculate the value added by the sawmill.
Value Added (Sawmill) = ₦350,000−₦200,000=₦150,000\text{₦}350,000 - \text{₦}200,000 = \text{₦}150,000
Value added is computed by subtracting intermediate consumption (timber cost) from gross output value (planks sale price).
3
Sum the value added across both production stages.
Total Value Added = ₦200,000+₦150,000=₦350,000\text{₦}200,000 + \text{₦}150,000 = \text{₦}350,000
The output method avoids double counting by summing only net value additions at each stage of production.

Key Concept

Output (Value Added) Method of Measuring National Income
Estimated Time:1m 0s
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Topics

Output (Value Added) Method of Measurement

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