Rules for Computing GDP

Question 1

List the 2 things that GDP measures

Answer 1

total expenditure and total purchases. The measurement of each is the same number because Income = Production

Question 2

Adding apples and oranges

Answer 2

GDP = (price of apples)(quantity of apples) + (price of oranges)(quantity of oranges)

Question 3

used goods

Answer 3

the sale of used goods is not included as part of GDP

Question 4

Why is the sale of used goods not included as part of GDP?

Answer 4

because GDP measures the value of currently produced goods and services, and a used good is a good produced previously.

Question 5

Are the price of inventories included in the GDP?

Answer 5

It depends. Rule of thumb is that when a firm increases its inventory of goods, this investment in inventory is counted as an expenditure by firm owners.

Question 6

Does a sale of an item out of a store’s inventory raise GDP?

Answer 6

No, sale out of inventory does not affect GDP because it is effectively negative spending by the firm (not current production to make it) and positive spending by the consumer, which offsets the former.

Question 7

Define intermediate goods

Answer 7

The goods that a firm buys to produce something else. Fx. a cattle rancher sells some meat to McDonalds for $1 and McDonald’s sells a hamburger for $3.