ECON 205– Chapter 6
Measuring the Production, Income, and Spending of Nations
6.1) Measuring GDP
To use GDP as a measure of production, we must consider the following:
- What is being produced
- Where production happens
- When production happens
GDP: a measure of the value of all the newly made goods and services a country produces in a
given period of time.
- Goods (cars, houses) and services (bus rides, college education) are included, all must
be newly produced
- These goods and services only count if they were made within the country’s borders.
Goods made by foreigners in the US are part of the US’s GDP.
- The period of time in which GDP is counted must always be specified.
Prices Determine the Importance of Goods and Services.
- Items with higher value have higher price and thus contribute more to GDP then items
with lower price.
- To add up unlike products, multiply the quantity of products by their price for the dollar
value sum.
Intermediate Goods versus Final Goods
- The same item must not be counted more than once when counting GDP
- Intermediate goods: goods that undergo further processing before being sold to
customers.
- Final goods: goods ready to be sold to customers.
- In a bike, the intermediate good would be the bike tire and the final good would be the
bike
- When counting GDP, we don’t count the bike tire and the bike. We only count the
bike.
- If you buy a tire many years later to fix the bike, the tire is the final good in that
scenario.
Stock versus Flow
- GDP is a flow. It measures the production of goods and services over a period of time,
not in a set time.
- Stock: The amount of stuff in a set time. Like the amount in stock. Water in a cup type
beat.
- Flow: The amount of stuff created over an extended period of time. Water coming out of
the sink for 2 mins type beat.
Three Ways to Measure GDP
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