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Current time:0:00Total duration:2:50

AP.MACRO:

MEA‑1 (EU)

, MEA‑1.A (LO)

, MEA‑1.A.3 (EK)

In the last video,
we touched a bit on the idea of final
goods and services. And we talked about
the situation in which in the given period that
we're calculating GDP. So this might be
in a given year. If we're essentially
starting from scratch and we put in the labor,
the land, we get the cotton. The market value of that
is $10, that raw cotton. And then we're able to turn
that into thread with a market value of $20 and we keep going. And we keep on going and
going all the way until we get the finished product of
jeans, which has a market value of $50, we saw
in the last video that the contribution
to GDP will just be this final product. It will just be the
$50 worth of jeans. And we know its value
based on its market value, what people are
willing to pay for it. We would not count all of
these intermediary goods. But that probably raised
the question in your head. What if all of this does
not happen in a given year? What if the period
ends, what if the year were to end right over here? So we're thinking
about GDP in a year, but we could think about GDP
in a quarter or whatever. What if the period under
question ends over here? So this is period one. Let's call this period one. And then this is going
to be period two. So in period one,
we get to the point that we have a market
value $20 worth of threat. And then period two, we get
all the way to the jeans. So this is period two over here. So this might be one year. And then this might be
the year after that. What would happen
is in period one, we would look at this good,
this intermediary good that's sitting in someone's inventory
someplace that's getting ready to be used to get
more finished, we would say this is the
contribution to GDP. And it would be
considered an investment because it's going to
be used in the future to produce other things. So in period one, the
contribution will be $20. And then in period
two, the contribution won't be just the $50. So we do get to a point that
the jeans are worth $50. But so that we haven't
double counted the same $20 in both period one
and period two, we'll subtract out what
our starting point was. Or essentially,
we'll subtract out the contribution, the
intermediary products that were already counted
in previous periods. Or you could say,
we'll subtract out the market value of the
inputs at the beginning of that period. So you'd say, $50 minus the $20. And so you would get
a contribution to GDP by taking this $20
intermediary good and turning it into
a $50 final good, the contribution to GDP in
period two would be $30.

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