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INDEX NUMBER THEORY AND MEASUREMENT ECONOMICS

The production approach 2 to the calculation of nominal GDP involves calculating the value of outputs produced by an industry and subtracting the value of intermediate inputs (or intermediate consumption to use the national accounting term) used in the industry. This difference in value is called the industry’s value added. Summing these industry estimates of value added leads to an estimate of national GDP. Producer Price Indexes are used to separately deflate both industry outputs and industry intermediate inputs. A Producer Price Index (PPI) is also used to deflate an industry’s nominal value added into value added at constant prices.