Final vs. Intermediate Goods & GDP Calculation

• Worksheet 1 is due on Friday, February 7, 2025.

Final Goods vs. Intermediate Goods

• Recycled steel purchased by a steel manufacturer is an intermediate good.
• An automobile purchased by a package delivery company is a final good.
• A computer purchased by a professor for classroom use is a final good.
• Bubble gum is a final good.
• An architect's scale model of a house is an intermediate good.
• A car purchased by an insurance salesman is a final good.

Double Counting

• Double counting arises when the value of intermediate goods is included in GDP calculations more than once.
• It leads to an overestimation of the economy's actual output.
• Examples include:
  • Including the value of wheat in GDP and then also including the value of bread made from that wheat.
  • Counting the value of steel used in car production separately from the final value of the car.

GDP vs. GNP Calculation (Jamaica Example):

• GDP (Gross Domestic Product) measures the value of goods and services produced within a country's borders.
• GNP (Gross National Product) measures the value of goods and services produced by a country's residents, regardless of location.
• Rent paid to a Jamaican who owns property in Trinidad is included in Jamaica's GNP.
• Salaries paid to Chinese workers on a construction project on Mandela Highway are included in Jamaica's GDP.
• Interest paid on a bond in a USA-based company to a Jamaican citizen is included in Jamaica's GNP.
• Profits earned in Jamaica by a Chinese-owned company are included in Jamaica's GDP.

Expenditure Approach to GDP

• The expenditure approach calculates GDP by summing up all spending on final goods and services within a country.
• The components of GDP using this approach are:
  • Consumption (C): Household spending on goods and services.
  • Investment (I): Business spending on capital goods, residential construction, and changes in inventories.
  • Government Purchases (G): Government spending on goods and services.
  • Net Exports (NX): Exports minus imports.
• GDP = C + I + G + NX

Real vs. Nominal GDP

• Nominal GDP is the total value of goods and services produced in a country at current prices.
• Real GDP is nominal GDP adjusted for inflation to reflect the value of goods and services at constant prices.
• Real GDP provides a more accurate measure of economic growth.

Computing GDP

To compute the value of GDP:

• GDP = Durable Goods + Nondurable Goods + Services + Nonresidential Investment + Changes in Business Inventories + Government Spending + Local Authorities Spending + Exports - Imports

• GDP = 659.30 + 1592.00 + 3234.50 + 846.90 + 68.40 + 523.80 + 928.90 + 957.10 - 1058.10

• GDP = 7752.8

• Spending Categories:

  • Consumption: Durable Goods + Nondurable Goods + Services = 659.30 + 1592.00 + 3234.50 = 5485.8
  • Investment: Nonresidential Investment + Changes in Business Inventories = 846.90 + 68.40 = 915.3
  • Government Purchases: Government Spending + Local Authorities Spending = 523.80 + 928.90 = 1452.7
  • Net Exports: Exports - Imports = 957.10 - 1058.10 = -101

National Income Accounting Concepts

• Per Capita National Income: National Income divided by the population, representing the average income per person.
• Relevance: Provides a measure of the standard of living in a country.
• Net Factor Income from Abroad: The difference between income earned by a country's residents from abroad and income earned by foreigners within the country.
• Relevance: Reflects the impact of international transactions on a country's income.
• Stock Appreciation: The increase in the value of inventory.
• Relevance: Affects profits and can impact tax liabilities.
• Intermediate Goods: Goods used in the production of other goods.
• Relevance: Not directly included in GDP to avoid double counting.

Macrovian Economy Calculations (Based on Table 6.4):

• Quantities are given in millions of Macrovian dollars (M$).
• GDP at Factor Cost: Compensation of Employees + Corporate Profits Minus Dividends + Government Transfer Payments and Interest + Indirect Business Taxes Minus Subsidies + Depreciation = 5,178.6 + 45.7 + 337.1 + 489.6 + 643.5 = 6,694.5
• Gross National Product (GNP): GDP + Net Factor Payments to the Rest of the World = Factor cost GDP + Net Factor Income from Abroad = 6,694.5 + (−17.3) = 6,677.2
• Net National Product (NNP) : GNP (6,677.2) - Depreciation (643.5) = 6033.7.
• National Income (NI): NNP (6,033.7) - Indirect Business Taxes Minus Subsidies (489.6)= 5,544.1