Question

Car firms buy raw materials (steel), intermediate goods (windscreens, tyres) and labour to make cars. Windscreen and tyre companies hire workers and also buy raw materials from other industries. What is the value added of the car industry (the three firms shown below)? $$ \begin{array}{|l|l|l|l|l|} \hline \text { Producer of } & \text { Output } & \text { Intermediate goods used } & \text { Raw materials used } & \text { Labour input } \\ \hline \text { Cars } & 1000 & 250 & 100 & 100 \\ \hline \text { Windscreens } & 150 & & 10 & 50 \\ \hline \text { Tyres } & 100 & & 10 & 30 \\ \hline \end{array} $$

Short answer

The value added of the car industry is 1000.

Step-by-step solution

Understand Value Added

Value added is calculated as the difference between the value of output and the cost of intermediate goods. It represents the contribution of the industry to the GDP.

Calculate Value Added for Cars

The car firm has an output value of 1000 and uses intermediate goods worth 250. Its value added is calculated as: \[\text{Value Added (Cars)} = 1000 - 250 = 750\]

Identify Components for Windscreen and Tyre Firms

For both the windscreen and tyre firms, only raw materials and labour are used. These are not intermediate goods but primary inputs, and they produce outputs of 150 and 100 respectively.

Calculate Value Added for Windscreens

Assuming no intermediate goods are reported, the value added is equal to the output value: \[\text{Value Added (Windscreens)} = 150\]

Calculate Value Added for Tyres

Similarly, assuming no intermediate goods are reported, the value added is equal to the output value: \[\text{Value Added (Tyres)} = 100\]

Sum Value Added Across All Firms

Add up the value added from the cars, windscreens, and tyre firms:\[\text{Total Value Added} = 750 + 150 + 100 = 1000\]

Conclusion: Value Added of Car Industry

The total value added by the car industry, combining the value added from all three firms (cars, windscreens, and tyres), is 1000.

Key concepts

Understanding Intermediate Goods

When we talk about intermediate goods, we mean products that are used as inputs to create another product, rather than being sold to consumers. For the car industry, intermediate goods include items like windscreens and tyres. These are essential products produced by specialized firms. They do not reach consumers in their standalone form, because they need to be combined with other parts to make the final product – in this case, a car.

Companies that produce intermediate goods sell them to other businesses rather than to end consumers. This is crucial for the production process because these goods add value to the final product. In the example of the car industry, the car manufacturer buys intermediate goods such as tyres and windscreens, incorporates them into the cars, and thus adds value by creating a finished vehicle that can be sold to consumers.

• Intermediate goods include partially assembled products.
• They are essential in the production chain but are not the end product.
• Proper accounting of intermediate goods is necessary to accurately determine the value added in production sequences.

Role of Raw Materials

Raw materials are the basic, unprocessed materials used in manufacturing. In the car industry example, steel is a common raw material. It supports the structural integrity of a vehicle and is shaped and refined to meet the specifications needed for car production.

Unlike intermediate goods, raw materials are not usually thought of as separate products manufactured for resale, but rather as fundamental materials that undergo significant transformation.

Access to quality raw materials like steel can greatly influence the production capacity and output quality of manufacturers. This is why businesses strive for stable supply chains and often invest in sustainable and cost-effective sources of raw materials. These inputs also play a critical role in calculating the cost of production and subsequently, the value added to the final product.

• Raw materials undergo processing and transformation.
• Their cost is a significant part of production expenses.
• They are often sourced from other industries or natural resources.

Importance of Labour Input

Labour input refers to the human effort used in the production process. In our car industry example, labour includes the work done by employees at all stages of car production—from assembling parts to managing logistics.

Unlike raw materials and intermediate goods, which are physical inputs, labour input represents the human element needed to produce goods and services. Effective labour input can boost productivity and enhance the quality of the final product.

Labour costs would typically include wages and benefits. They are crucial for businesses since skilled labour can drive innovation and efficiency. However, labour costs must be balanced with other production expenses to maximize value added in the production process.

• Labour input involves every individual contribution to a production chain.
• It is both a cost factor and a value generator.
• The quality and skills of the workforce significantly affect the production outcome.