- GDP does not count intermediate goods Intermediate goods: goods used up entirely in the production of final goods. Like grain in the making of bread, you wouldn’t count the grain in the output because it is a part of the bread and in doing so would be like counting it twice. Value added: the dollar value of an industry’s sales minus the value of intermediate goods ( for example, raw materials and parts) used in production. Gross Output: the total market value of all goods and services produced during a year by factors of production located within a nations borders, including all forms of business-to-business expenditures and thereby double counting business spending across all stages of production. - this includes all transactions and goods and services including intermediate goods. It is the governments way of tracking all values. Things that do not get added into the GDP 1) Financial transactions: this includes the buying and selling of securities, government transfer payments, and private transfer payments
- Securities: buying and selling stuff, like stock if you spend 100$ on a stock you are simply transferring that money to someone else thus no GDP value added unless there was fee involved outside of the transfer of money like if a stockbroker charged a 50$ fee, that 50$ is included as income and would include in the GDP - Government Transfer Payments: this is things in which a service was not provided though the government dispersed money such as your social security benefits and unemployment compensation. There is no added production therefore there is no add GDP - Private Transfer Payments: this is two private parties giving or receiving money. Like on your birthday when you receive money, or borrowing money from your parents or anything like that where a service or production was not induced, is a private transfer payment 2) Transfer of secondhand goods: like selling your old laptop or car. The original purchase price was included in GDP but the transaction of a secondhand good does not get included. If you did count it into the GDP it would be counting it twice. 3) other excluded transactions: - household production: childcare, housecleaning, for your own household would not include in the GDP - legal underground transactions: under the table transactions that were not taxed - illegal underground activities: illegal gambling, buying and selling of illicit drugs Limitations of the GDP: - GDP excludes non-market production: household services can make a difference in societies that are suburbanized to where that is a lot of production. Or it can be different among countries with different laws. Legal Gambling is counted in the GDP which can cause problems for those countries that consider it illegal. - GDP is not a direct measure of human well-being: it does not include the difference in labors, declines in personal safety, or quantity or quality of leisure time GDP is a measure of the value of production in terms of market prices and an indicator of economic activity. It is not a measure of a nation’s overall welfare.
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