The table below describes the value added in the production of a gallon of gasoline by each stage of production
(The values are hypothetical.)
a) What is the value added by each stage of production?
b) What is the total value added?
For simplicity, you can ignore the cost of the inputs for oil drilling.
Stage of Production Value of Sales Value Added
Oil drilling 0.75 $0.75
Refining 1.25 0.50
Shipping 1.85 0.60
Retail sales 3.65 1.80
$3.65
a) The value added is the difference between the price the firm sells a good for and the price it paid other firms for the intermediate good. The firm that does the oil drilling sells the gallon of oil to the refinery for $0.75. Since we are assuming no other input costs for simplicity, the value added by the drilling firm is $0.75. The refinery processes the oil and then sells it to the transport company for $1.25. The refinery's value added is $0.50. The transport company sells the oil to the retail company for $1.85. The transport company's value added is $1.85 - $1.25 = $0.60. Finally, the retail gas station sells the gallon of gas for $3.65. The value added by the retail station is $1.80.
b) The total value added is found by summing the value added by each firm involved the production of the gallon of gas. The retail price is the same at this total of value added.
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