EC140 Chapter Notes - Chapter 20: Environmental Quality, Retained Earnings, Gdp Deflator

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graykangaroo709

4 Feb 2016

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Clicker question: nominal gdp increases faster than real gdp because the general price level has increased. Clicker question: total value added in an economy is equal to the value of all intermediate and final goods produced. Clicker question: gdp and gross domestic expenditure are conceptually identical. Gdp is total production in a country. Outputs of one company are inputs to another. Measuring value of output counts some output more than once. Measuring gpd is about measuring final production. To avoid double counting - measure value added by all firms. Value added is sales revenue - cost of intermediate gods. Value added equal to wages paid to workers plus 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.

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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 $_____.

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.

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

graydeer810

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 Chapter Notes - Chapter 20: Environmental Quality, Retained Earnings, Gdp Deflator

EC140 Full Course Notes

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