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More on final and intermediate GDP contributions

AP.MACRO:
MEA‑1 (EU)
,
MEA‑1.A (LO)
,
MEA‑1.A.3 (EK)
If you make some cloth and someone uses that cloth to produce something else, how does that show up in the calculation of GDP? In this video, learn how GDP deals with intermediate goods. Created by Sal Khan.

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  • leaf green style avatar for user hollis.thomas
    What if parts of the product (the cotton fabric) are produced in another country, but the final product is assembled (the final stitch in the jeans) in the subject country? Does all of the value of the final product count toward the GDP of the subject country?
    (43 votes)
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    • leaf blue style avatar for user levicrews24
      The cost of the cotton fabric in this case is an investment in the final product (jeans), so it should be subtracted from the cost of the final product. To use the video as an example, imagine if period 1 was replaced with country 1 and period 2 with country 2. The $20 for fabric would count towards the GDP of country 1, and the $50-$20=$30 would count towards the GDP of country 2.
      (47 votes)
  • leaf yellow style avatar for user catherinekent1116
    How do economists know how much to subtract so that they don't double count anything?
    (19 votes)
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    • blobby green style avatar for user Miljana.Jovanovic.HULT
      Well, if you look at how a company operates, you will find that there is a lot to report to the governamet: about the quantity of goods that they are producing it and to whom they are selling it to: eg. if they are selling bread to the restaurants for the purpose of making sandwiches, than the external auditor will check the tick box in his report that says: not final. If they are selling the bread in their local bakery to consumers directly, that the auditors will check the tick box: final goods! The quantities show on every income statement. And every company is reporting these to the goevrnament for the taxation purposes, so eventually teh governament knows and the institution that calculates GDP will know accuaretly. Regarding the inflated GDP, it can happen, if the company's accountant knows how to "cook the books", and do inacurate reposting in order for the company to pay less taxes. It is illegal but sometimes happen.
      (33 votes)
  • leaf green style avatar for user karan shah
    So this could mean the GDP could be negative?
    If I value of an unfinished good at the end of a period is say $100 and the price comes down to $80 in the next term, then the GDP of the next term in question would be negative!
    (11 votes)
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  • leaf green style avatar for user iLive2Learn
    What happens, let's say in a business:
    Total expenses for the year : 560,000
    Total Revenue for the year: 520,000
    What would we add to the GDP? 560k or 520k or do we add -40k?
    Thanks in advance
    (10 votes)
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  • blobby green style avatar for user mensch
    what about assets that a country owns (like mines, minerals, etc). They are also raw materials (but may or may not turn into final products - like the cotton thread may not be bought by anyone to convert into jeans). will that be included in GDP calculation?
    (3 votes)
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    • aqualine ultimate style avatar for user dlvieitez
      No, because GPD only counts production ("P"), and such assets have not been produced.

      In the example in the video, the cotton that was cultivated has a production value of $10 - but the soil before it was not counted. So, iron ore in a mine is not calculated for GDP - until it is extracted.

      One could, instead of "Gross Domestic Product", calculate the "Gross Domestic Wealth", and take there into account all the assets that exist. It's entirely possible, it's just another thing.
      (2 votes)
  • orange juice squid orange style avatar for user Robert Kacir
    In practical terms how do governments apply these principles when measuring GDP for official statistics? They could not track individual products. Is measured GDP revenue of the firms in a nation? If so does that miss several aspects of GDP (i.e. the incomplete products in warehouses that are now considered expenses that will later generate revenue)?
    (5 votes)
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    • leafers ultimate style avatar for user Andris
      As you point out there are several flaws in the measurement of the GDP, but it is still the best measure economists could come up with.

      I am not sure what you mean by individual products. All products are measured that can be measured (all firms, big and small alike, have to tell the government how much they produced, so that can be measured). The black market (selling of guns, drugs, etc...) are not measured evidently, because no knows the exact amount of those transactions. The products made and consumed at home (like vegetable from the garden) are not counted either for similar reasons. All other products are counted and part of GDP.
      Incomplete products are part of GDP as well, firms have to evaluate how much those products are worth, and later compensate by the real market value if they are sold.
      (3 votes)
  • orange juice squid orange style avatar for user Hèlen Grives
    That sounds all nice, but what if people wait for the sale to buy their goods. Then the market value is more of a wanted value than the actual market value of the consumer. The market value has a bit of a bias in it. Especially considered dumping goods on the market. Those good have a market value below their own market value.
    (5 votes)
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    • piceratops ultimate style avatar for user Emi
      The market value is set by the buyers--it is the price people are willing to pay for an item. For test questions, etc. it will be simplified, but in reality market value is very complicated and changes from day to day and person to person. The prices companies set are what they think people will want to pay--it's just a guess. When things go on sale, it means the company guessed too high. When things sell out, the company probably guessed too low.

      *TL;DR: The market value is absolutely the "wanted value" and has less to do with the price a company puts on its goods.*
      (2 votes)
  • blobby green style avatar for user Takuya  Matsuo
    How can I know whether a good is a intermediate good or a final goods?
    (4 votes)
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    • leaf yellow style avatar for user catherinekent1116
      An intermediate good is any thing produced that is not going to be sold directly to consumers. A final good is sold directly to consumers (households) as a final product (Buzz Lightyear toys would be a final product but the plastic and dye for the plastic would be intermediate goods).
      (3 votes)
  • mr pants teal style avatar for user AyushiChokshi4
    So poor countries cannot improve their GDP because they can't educate their children so it is low, and it's vice virsa for rich countries such as the U.S.?
    (2 votes)
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    • ohnoes default style avatar for user Tejas
      That is not the case. In reality, poor countries tend to have higher rates of growth than rich countries. This is mainly because the cost of unskilled labor is cheaper in poorer countries, because the standard of living is lower. That results in workers being more willing to accept lower wages, which means a faster economic growth.
      (4 votes)
  • leaf green style avatar for user hakshud
    Lets say no one purchases the jeans given in the example. Would it's Market Value be 0 dollars or would it be valued at the last stage where an exchange was made?

    If everything in that chain of production were owned by the same company and the company didn't sell the jeans would market value be 0?
    (2 votes)
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    • blobby green style avatar for user longbrake.13
      Since the jeans haven't been sold they would not be counted towards the consumption (C) part of GDP. Thus they would not have a market value. However since they have been produced they would still count towards GDP. The place they would show up is in the Investment (I) category. Investment includes inventories, and since the jeans haven't been sold they would still show up in the company's inventory. GDP would increase by the inventory value of the jeans. When the jeans are sold the market value of the jeans is added to the C component of GDP and the inventory value is subtracted from the I component.

      This would be the same for any unsold product regardless of who controls the chain of production.
      (4 votes)

Video transcript

In the last video, we touched a bit on the idea of final goods and services. And we talked about the situation in which in the given period that we're calculating GDP. So this might be in a given year. If we're essentially starting from scratch and we put in the labor, the land, we get the cotton. The market value of that is $10, that raw cotton. And then we're able to turn that into thread with a market value of $20 and we keep going. And we keep on going and going all the way until we get the finished product of jeans, which has a market value of $50, we saw in the last video that the contribution to GDP will just be this final product. It will just be the $50 worth of jeans. And we know its value based on its market value, what people are willing to pay for it. We would not count all of these intermediary goods. But that probably raised the question in your head. What if all of this does not happen in a given year? What if the period ends, what if the year were to end right over here? So we're thinking about GDP in a year, but we could think about GDP in a quarter or whatever. What if the period under question ends over here? So this is period one. Let's call this period one. And then this is going to be period two. So in period one, we get to the point that we have a market value $20 worth of threat. And then period two, we get all the way to the jeans. So this is period two over here. So this might be one year. And then this might be the year after that. What would happen is in period one, we would look at this good, this intermediary good that's sitting in someone's inventory someplace that's getting ready to be used to get more finished, we would say this is the contribution to GDP. And it would be considered an investment because it's going to be used in the future to produce other things. So in period one, the contribution will be $20. And then in period two, the contribution won't be just the $50. So we do get to a point that the jeans are worth $50. But so that we haven't double counted the same $20 in both period one and period two, we'll subtract out what our starting point was. Or essentially, we'll subtract out the contribution, the intermediary products that were already counted in previous periods. Or you could say, we'll subtract out the market value of the inputs at the beginning of that period. So you'd say, $50 minus the $20. And so you would get a contribution to GDP by taking this $20 intermediary good and turning it into a $50 final good, the contribution to GDP in period two would be $30.