ECON 110 Chapter Notes - Chapter 20: Fixed Investment, Factor Cost, Gdp Deflator
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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 |
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 $_____.