1) U.S. real GDP is substantially higher today than it was 60 years ago. What do
ID: 1190653 • Letter: 1
Question
1) U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents? What are the limitations of the GDP as a measure of economic well-being? Given the limitations, why is GDP usually regarded as the best single measure of a society’s economic well-being?
2) What is an intermediate good? How does an intermediate good differ from a final good? Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.
3) GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.
4) The table below contains data for country A for the year 2010.
Household purchases of durable goods
$1293
Household purchases of nondurable goods
$1717
Household purchases of services
$301
Household purchases of new housing
$704
Purchases of capital equipment
$310
Inventory changes
$374
Purchases of new structures
$611
Depreciation
$117
Salaries of government workers
$1422
Government expenditures on public works
$553
Transfer payments
$777
Foreign purchases of domestically produced goods
$88
Domestic purchases of foreign goods
$120
Refer to the Table above to answer the following questions.
a. What was country A’s GDP in 2010?
b. What was country A’s consumption in 2010?
c. What was country A’s investment in 2010?
d. What were country A’s government purchases in 2010?
e. What were country A’s exports and imports in 2010? What was the net export in 2010?
Household purchases of durable goods
$1293
Household purchases of nondurable goods
$1717
Household purchases of services
$301
Household purchases of new housing
$704
Purchases of capital equipment
$310
Inventory changes
$374
Purchases of new structures
$611
Depreciation
$117
Salaries of government workers
$1422
Government expenditures on public works
$553
Transfer payments
$777
Foreign purchases of domestically produced goods
$88
Domestic purchases of foreign goods
$120
Explanation / Answer
2) Intermediate goods and final goods: Intermediate goods are those which are partly produced. In the production process it can be considered as inputs also. Intermediate goods can be sold directly or can be used in other production. A firm itself can use it or can sell to other. On the other hand final goods are sold to customer directly. For example consider sugar. It is an intermediate good. It can be sold directly or it can used in chocolate production. Another example is steel, it is used in many production.
GDP or gross domestic product measures total value of final goods and services in a year within country. It always takes into consideration final goods. Intermediate goods are not included in GDP measurement to avoid double accounting problem. The value of intermediate goods are included into value of final goods, and the value of final goods is calculated as a part of GDP, then if the value of intermediate goods in included along with final goods in GDP measurement, the the value of intermediate goods appear two time. This why the value of intermediate goods are not included in GDP measurement.
The unsold intermediate goods remain as inventory. Inventory change is reflected in investment. if a firm buy is unable to sell its intermediate goods then the inventory increases so as inventory investment. This is why unsold intermediate ggods are included in GDP as a component of investment.
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