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We divide all firms into 3 categories: FR includes all firms which acquire raw material (iron ore, farm products and so on), FH all those that produce semi-manufactured goods (steel, pulp and so on) and FF all firms producing finished goods (software, cars and so on). We use the symbol Y for GDP. All of Y will go to the firms in FF box. Though if we sum the value added from all firms, we would get exactly Y. This is why:
Figure
Goods in the circular flow
Also a particular firm may be producing in many of the boxes.
Because the value added in every firm is equal to the return to factors of production, total return to the factor market should be equal to the sum of value added from all firms that is equal to Y.
The total return to the factor market = Sum of all value added = GDP
how is it calculated
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Hello, I am having difficulty in understanding what multiplier is.
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