Study Note - Value Added and Contributions to a Nation’s GDP

There are three main wealth-generating sectors of the economy – manufacturing, oil& gas, farming, forestry & fishing and a wide range of service-sector industries. This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added

Value added is simply the increase in the value of goods or services as a result of the production process

Value added = value of production - value of intermediate goods

Let us say that you buy a ham and mushroom pizza from Dominos at a price of £14.99. This is the final retail price and will count as consumption. The pizza has many ingredients at different stages of the supply chain – for example tomato growers, dough, mushroom farmers and also the value created by Dominos themselves as they put the pizza together and get it to the consumer.

Some products have a low value-added, for example those really cheap tee-shirts that you might find in a supermarket for little more than £5. These are low cost, high volume, low priced products.

Other goods and services are such that lots of value can be added as we move from sourcing the raw materials through to the final product. Examples include designer jewellery, perfumes, meals in expensive restaurants and sports cars. And also the increasingly lucrative computer games industry.

GDP by output – the distribution of GDP from different industries

The UK is an advanced economy where the majority of GDP comes from the service industries such as banking and finance, tourism, retailing, education and health and a vast range of other businesses services. In 2008 less than half of one per cent of our GDP came from the agricultural sector. Manufacturing accounted for less than 15 per cent of GDP and construction a further 6 per cent. In contrast, the service industries now contribute nearly three quarters of national income.

Manufacturing and service industries are not separate! For example the health of a car exporting business will have a direct bearing on demand, output, profits and jobs in many service businesses such as transportation, design, marketing and vehicle retailing. Equally service businesses such as online banking require plenty of physical inputs such as machinery and infrastructure to be successful.

The main service sector industries in the UK are as follows:

Hotels and restaurants, and a range of services provided by local government Transport, logistics, storage and communication Business services and finance, motor trade, wholesale trades and retail trade Land transport and air transport, post and telecommunications Real estate activities, computer and related activities, Education, Health and social work Sewage and refuse disposal Recreational, cultural and sporting activities