Chapter : MACROECONOMIC MEASUREMENTS,

GDP AND REAL GDP

Page: 134 (PDF)

Gross Domestic Product (GDP)

The total market value of all final goods and services produced annually within a
country’s borders. For Example

In 2020 (Bangladesh)

Rice Quantity = 50 unit, Price of Rice $10

Juice Quantity = 100 unit , Price of Juice $20

GDP in 2020 = 50*$10 + 100*$20 = $2500

Final good and Intermediate Good

A final good (or service) is a good in the hands of the final user, or ultimate
consumer. Think of buyers standing in line one after another. The first buyer in our
simple economy was Jim. He bought oranges from Bob. The second buyer was
Caroline, who bought orange juice from Jim. Caroline is the final buyer in this
economy; she is the final user, the ultimate consumer. No buyer comes after her.
The good that she buys is the final good. In other words, the orange juice is the
final good. So, then, what are the oranges? Aren’t they a final good too? No. The
oranges are an intermediate good.

An intermediate good is an input in the production of a final good. In other

words, the oranges were used to produce orange juice (the final good). So what
does GDP equal if we use the expenditure approach to compute it? Again, it is the
dollar amount spent by buyers for final goods and services. In our simple economy,
there is only one buyer (Caroline), who spends $10 on one final good (orange
juice). Thus, GDP in our tiny economy is $10.

What GDP Omits

Some exchanges that take place in an economy are not included in GDP. As the
following paragraphs indicate, these trades range from sales of used cars to illegal
drug deals.

1. Certain Nonmarket Goods And Services If a family hires a person through

the classified section of the newspaper to cook and clean, the service is
counted in GDP. If family members perform the same tasks, however, their
services are not counted in GDP. The difference is that, in the first case, a
service is actually bought and sold for a price in a market setting, and in the
other case, it is not. Some nonmarket goods are included in GDP. For
example, the market value of food produced on a farm and consumed by the
farm family is estimated, and this imputed value is part of GDP

2. Underground Activities, Both Legal And Illegal The underground economy

consists of unreported exchanges that take place outside the normal recorded
market channels. Some underground activities involve illegal goods (e.g.,
cocaine), and others involve legal goods and tax evasion. Illegal goods and
services are not counted in GDP because no record exists of such
transactions. There are no written records of illegal drug sales, illegal
gambling, and illegal prostitution. Nor are there written records of some
legal activities that individuals want to keep from government notice
3. Sales Of Used Goods: GDP measures current production (i.e., occurring
during the current year). A used car sale, for example, does not enter into the
current-year statistics because the car was counted when it was originally
produced.

4. Financial Transactions : The trading of stocks and bonds is not counted in

GDP because it does not represent the production of new assets. It is simply
the trading of existing assets (the exchange of stocks or bonds for money).

5. Government Transfer Payments : A transfer payment is a payment to a

person that is not made in return for goods and services currently supplied.
Government transfer payments—such as Social Security benefits and
veterans’ benefits—are not counted in GDP because they do not represent
payments to individuals for current production.