EC140 Lecture Notes - Lecture 20: Environmental Quality, Gdp Deflator, Counting Measure

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azuresquirrel267

10 Jul 2016

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Gdp is total production in a country. If all production was sold and consumed, gdp would be easy to measure. Outputs of one company are inputs to another. Measuring value of output counts some output more than once. Measuring gdp is about measuring final production. To avoid double counting measure value added by all firms. Value added = sales revenue - cost of intermediate goods. Value added = wages paid to workers + profits paid to owners. Total value added is a measure of total output. Gdp is the total value of final goods and services produced. Equals the value of expenditure on output. Also equals the income generated by producing that output. Production, expenditure, and income are all equal by definition. Consumption expenditure: goods and services sold to final users. Investment expenditure: goods not for current consumption, inventory, plant/equipment, housing. Government purchases: current expenditure, government investment. Net exports: total exports minus total imports, count goods and services.

Related Questions

The table below shows the price of inputs and the price of outputs at each step in the production process of making a shirt. Assume that each of these steps takes place within the country.

	Cotton farmer	Fabric maker	Sewing and printing
Inputs	$0	$1.10	$3.50
Value of output	$1.10	$3.50	$18.00

a. Using the standard expenditure method, the total contribution of this shirt to GDP is $_____.

b. If we use a value-added method (i.e., summing the value-added by producers at each step of the production process, equal to the price of inputs minus the price of outputs), the contribution of this shirt to GDP is $_____.

c. If we mistakenly added the price of both intermediate and final outputs without adjusting for value-added, we would find that this shirt contributes $_____ to GDP and this overestimates the true contribution by $_____.

In a given year, we find the value of final goods and services produced in the economy is $15t. Your professor told you that this is the expenditure approach to measuring GDP. He also told you we can measure GDP using the value of all the incomes generated from that production, but when you do, the dollar value of incomes is less than $15t. Please explain why this is so AND how this problem is corrected.

yellowwoodchuck103

Intermediate goods are goods and services that are purchased for resale or for further processing or manufacturing. Final goods are consumer goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing. Including the value of intermediate goods in the measure of real GDP would amount to multiple counting, and therefore distort the value of GDP. Value added is the market value of a firm’s output less the value of the inputs the firm has bought from others.

Using the table below, calculate the total sales values, value-added, and fill in the missing boxes. The product is assembled for sale is a fancy wool suit.

Stages of Production	Sales Value of Materials or Product	Value Added
	$0
Firm A: Sheep Ranch		$120
Firm B: Wool Processor	$180
Firm C: Suit Manufacturer	$220
Firm D: Clothing Wholesaler		$50
Firm E: Retail Clothier (Market)		$80
Total Sales Value
Total Value Added

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EC140 Lecture Notes - Lecture 20: Environmental Quality, Gdp Deflator, Counting Measure

EC140 Full Course Notes

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