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### Course: Macroeconomics>Unit 1

Lesson 2: GDP and the circular flow of income and expenditures

# More on final and intermediate GDP contributions

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.

## Want to join the conversation?

• 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?
• 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.
• How do economists know how much to subtract so that they don't double count anything?
• 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.
• 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!
• GDP cannot be negative at any time. The growth rate of GDP can be negative, this leads to recession and depression cycles. Economists sometimes say two consecutive quarters of negative GDP growth is called a recession and four consecutive is depression.
• 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?
• I believe GDP would be 520k. In the previous video the formula is GDP = Firm Revenue = Firm Expenses + Profit.

Firm Revenue = 520k

Firm Expenses + Profit = 560k + -40k = 520k

GDP = 520k
• 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)?
• 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.
• 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.
• 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.*
(1 vote)
• How can I know whether a good is a intermediate good or a final goods?
• 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).
• when an entity use labor and produce goods whose value is less than the labor and raw material combined then what happens? value of final product gets counted in GDP or value of labor and raw material?
• If the value of final product is less than the labor+raw material, then it simply means someone (factory owner) is losing money. In this case, his/her profit is a negative number. Therefore, we have value of final goods = factory expense (which is labor + raw material) + profit of the owner. And that's the value get counted in GDP.
• I am not sure that this would get answered seems like this is 4-5 yrs old. Here is what I am confused at. You have 4 different companies in the US Cotton, Thread, material, clothing(jeans).
All of these different companies have their own final product they do not care about the next man. So why would these other companies not report a GDP on their final product. The cotton manufacturer why is he not going to have a GDP (I understand that it will double or triple the numbers.) But they did produce something and sell it. then the same with the thread manufacturer and so on.
In the end they all have their own final product.