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Measuring and Understanding the Relationship Between Air Service and Regional Economic Development (2022)

Chapter: Appendix IV A Simplified Explanation of Gross DomesticProduct and Economic Output

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Page 105
Suggested Citation:"Appendix IV A Simplified Explanation of Gross DomesticProduct and Economic Output." National Academies of Sciences, Engineering, and Medicine. 2022. Measuring and Understanding the Relationship Between Air Service and Regional Economic Development. Washington, DC: The National Academies Press. doi: 10.17226/26682.
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Page 105
Page 106
Suggested Citation:"Appendix IV A Simplified Explanation of Gross DomesticProduct and Economic Output." National Academies of Sciences, Engineering, and Medicine. 2022. Measuring and Understanding the Relationship Between Air Service and Regional Economic Development. Washington, DC: The National Academies Press. doi: 10.17226/26682.
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Page 106

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105 A P P E N D I X I V A Simplified Explanation of Gross Domestic Product and Economic Output GDP is a fundamental measurement of economic activity in a nation, region, or state for a given period. It accounts for the value added to a good or service by a business process -- that is, the transformative value of labor to raw materials (and returns to capital) that yields the new value. Employee wages and company profits are included in value added, because they are part of the process of transforming an input into some other good or service. GDP measures the total value added of all final goods and services produced within an economy during that period. GDP is a component of total economic output. By contrast, economic output (sometimes called “economic activity”) reflects an industry's sales to consumers and final users (found in GDP), as well as sales to other industries (which are called “intermediate inputs” and are not counted in GDP). According to the BEA, output reflects the full value of the supply chain by including the business-to-business spending necessary to produce goods and services and deliver them to final consumers. An example can illustrate how the concepts differ and how they are calculated. Consider a hypothetical simplified economy in which product X is created and sold. There are four stages of the production, distribution and sales process: – Manufacturing. Company 1 takes raw inputs and manufactures component parts of product X. The manufacturing process – including the labor required – creates value added to the raw inputs. The company then sells its output for $5 to… – Fabrication. Company 2 takes the component parts and assembles them into a unit of product X. Assembling the different parts into a distinctive product X creates $7 in added value. Company 2 then sells product X for $12 to… – Wholesaler. Company 3 brings the units of product X from the fabricator to a warehouse, where it adds $8 in new value by storing, organizing, repackaging, and distributing them, eventually selling them for $20 to… – Retail. Company 4 takes the units of product X and adds $15 in additional value. It moves product X to its retail outlets, displays them, and ultimately sells them for $35 to final consumers.

106 Table IV-1: Hypothetical Example of Value Added and Total Output of a Manufactured Good Stage Cost of Inputs Value Added (GDP) Price of Output (Economic Output) Manufacturing $0 $5 $5 Fabrication $5 $7 $12 Wholesaling $12 $8 $20 Retailing $20 $15 $35 Total $35 $72 The final cost of product X to the consumer is $35. The sum of the value added of the product is also $35. It does not include the costs of inputs (intermediate supplies). Value added represents the value of final goods and services sold. In other words, GDP is a measure of the wealth created by economic activity. Economic output or activity equals the total prices of all goods sold in this supply chain, or $72 in this example. This measure captures both the value added and the intermediate sales between firms in the supply chain. Another way to see this is that it adds the costs of inputs ($37) to the value added ($35) to equal total economic activity ($72). The important note here is that, as the sum of the final purchases and intermediate inputs, economic output results in the double counting of intermediate purchases. In the example above, the original cost of the manufactured good sold to the fabricator gets counted then, again as part of the price of the fabricator’s output to the wholesaler, again in the price of the wholesaler’s output to the retailer, and again in the final cost to the consumer. Additional and Important Nuance. When limited to a single region (e.g., a state such as Colorado), GDP is an important measure of economic activity and value creation in that area. A complete definition of GDP accounts for net imports and exports. Economic activity and value added that occur outside the region (e.g., in Florida) are not included in the accounting of Colorado’s GDP. In the example above, if the fabrication step in the process was performed in Florida rather than Colorado, the value added of that step ($7) would not be counted as part of Colorado’s GDP. (The $12 of output from this step would also not be counted in Colorado’s economic output.) In this way, GDP is a better measure of the creation of economic activity and wealth in a region or state. Note: the value added at each step is the difference between the cost of the inputs and the price of the outputs. That difference is the monetary reflection of the “value added” by each company in the process.

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Airport economic impact studies may accurately measure the activity that occurs on airport properties or is tied directly to airport operations (such as off-site parking and hotels that accommodate airline crew who overnight in a location), but they do not capture how air service supports business and employment throughout the region.

The TRB Airport Cooperative Research Program's ACRP Web-Only Document 53: Measuring and Understanding the Relationship Between Air Service and Regional Economic Development provides airports and major regional stakeholders concerned with economic development with the information and tools necessary to understand and communicate the nexus between air service and regional employment.

The Web-Only Document is supplemental to ACRP WebResource 12: Air Service Development and Regional Economic Activity. Supplemental to the Web-Only Document is a Case Study Compilation with the full versions of the 14 case studies performed as part of the project.

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