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Economics 12

Economics 12. Ch. 9 Ms. Park. Next Presenters. Karen Lintao. Reveiw. What are three methods of calculating GDP?. Review. GDP is the market value of _____ goods and services produced in a country during a given period. Final goods vs. Intermediate goods.

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Economics 12

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  1. Economics 12 Ch. 9 Ms. Park

  2. Next Presenters • Karen • Lintao

  3. Reveiw • What are three methods of calculating GDP?

  4. Review • GDP is the market value of _____ goods and services produced in a country during a given period

  5. Final goods vs. Intermediate goods • Final goods or services: consumed by the ultimate user and cannot be resold. They are end products of the production and are counted as part of GDP. • Intermediate goods or services: used up in the production of final goods and services, and will be resold. They are therefore NOT counted as part of GDP.

  6. Example • Suppose that grain has market value of $0.50. Milling company paid $0.50 for the grain and then turned the grain into flour. The flour was sold to local bakery for $1.20. The baker uses the flour to produce a loaf of French bread, worth $2.00. • In calculating GDP, would we add together the values of the grain, the flour, and the bread?

  7. Answer • No, because the grain and flour are intermediate goods. • The total contribution to GDP is $2, the value of loaf of French bread- the final good

  8. Double counting • Double counting: the problem of adding to GDP the same item at different stages in its production.

  9. Value Added • Adding together the value of all final goods and services = adding up the value addedby all firms in the production process • Value added: for any firm, the market value of its product or service minus the cost of inputs purchased from other firms

  10. Example • Milling company paid $0.50 for the grain and then turned the grain into flour. The flour was sold to local bakery for $1.20. The baker uses the flour to produce a loaf of French bread, worth $2.00. ProductionTotal ValueValue addedBusiness that StageAdds Value Grain is produced, $0.50 $0.50 Farmer sold to milling company Grain is turned Into flour, $1.20 $0.70 Milling company sold to local bakery Flour is turned Into bread, $2.00 $0.80 Local bakery sold to consumer ________ _______ $ 3.70 $2.00

  11. Example • Logging company cuts trees, and sells woods to paper producer for $1.00 • Paper company produces papers from the woods, and sells the papers to retailer for $1.50. • Retailer sells the papers to consumer at a price of $1.75.

  12. GDP: Within a given country • The word Gross Domestic Product tells us that GDP is a measure of economic activity within a given country. • Thus, only production that takes place within the country’s borders is counter. • Ex. Cars produced in Canada by a US-based company, General Motors, are not counted in US GDP

  13. GDP • GDP is the market value of final goods and services produced in a country during _________________.

  14. GDP: Within a given period • Only goods produced in a given period, usually the calendar year, are included in GDP • Ex. A 20-year-old house is sold to Parker family for $100,000. The family pays the real estate agent a 6% commission. What is the contribution of this transaction to GDP?

  15. Answer • Because the house was not produced during the current year, its value is not counted in this year’s GDP. The value of the house was included in the GDP 20 years ago, when the house was built. • In general, purchases and sales of existing assets, such as old houses or used cars, do not contribute to the current year’s GDP. • However, the agent’s service is included in the GDP. Therefore, $6,000 will be part of this year’s GDP.

  16. Expenditure Method • GDP is a measure of the quantity of goods and services PRODUCED by an economy • Any good or service that is produced will also be PURCHASED and used by someone • Production method = Expenditure method

  17. Expenditure Method Cont. • Users of the final goods and services that make up the GDP are divided into four categories: 1) households, 2) firms, 3) governments, and 4) the foreign sector (foreign purchasers of domestic product)

  18. Expenditure Method Cont. • There are four components of expenditure: 1) Consumption, 2) Private-sector investment, 3) Government purchases, and 4) Net exports

  19. Due today • Textbook Questions: #3 & 4 • Handout Problems: #2

  20. Exit Slips 1. GDP is the _______ value of ________ goods and services produced in a country _________________. 2. What’s the difference between intermediate goods and final goods? 3. Define double counting.

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