Question

Imagine a company that sells hammers charges customers $10 for each hammer. To make the hammer the company spends $7 on input costs (materials, machines, etc.). Which method for calculating GDP focuses on gathering data on the difference between the final cost of the hammer and the input costs ($3)?

Answer 1

Answer: Production Method

Explanation: Gross domestic product, also known as GDP, calculates the total value of products and sevices that are produced in an economy. This in turn measures the total income of a country.

The method that applies in this scenario is the production method. This method focuses on goods, by looking at its final value after deducting the input costs, also known as intermediate goods. Input costs (or intermediate goods) are the cost of materials that were used to make the final product, i.e. the production costs. Once the input costs are deducted from the total value of the goods , what remains becomes the actual income of the goods, the final cost, which is then added to GDP.