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More on final and intermediate GDP contributions

If you make some cloth and someone uses that cloth to produce something else, how does that show up in the calculation of GDP? In this video, learn how GDP deals with intermediate goods. Created by Sal Khan.

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  • leaf green style avatar for user hollis.thomas
    What if parts of the product (the cotton fabric) are produced in another country, but the final product is assembled (the final stitch in the jeans) in the subject country? Does all of the value of the final product count toward the GDP of the subject country?
    (42 votes)
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    • leaf blue style avatar for user levicrews24
      The cost of the cotton fabric in this case is an investment in the final product (jeans), so it should be subtracted from the cost of the final product. To use the video as an example, imagine if period 1 was replaced with country 1 and period 2 with country 2. The $20 for fabric would count towards the GDP of country 1, and the $50-$20=$30 would count towards the GDP of country 2.
      (47 votes)
  • leaf yellow style avatar for user catherinekent1116
    How do economists know how much to subtract so that they don't double count anything?
    (18 votes)
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    • blobby green style avatar for user Miljana.Jovanovic.HULT
      Well, if you look at how a company operates, you will find that there is a lot to report to the governamet: about the quantity of goods that they are producing it and to whom they are selling it to: eg. if they are selling bread to the restaurants for the purpose of making sandwiches, than the external auditor will check the tick box in his report that says: not final. If they are selling the bread in their local bakery to consumers directly, that the auditors will check the tick box: final goods! The quantities show on every income statement. And every company is reporting these to the goevrnament for the taxation purposes, so eventually teh governament knows and the institution that calculates GDP will know accuaretly. Regarding the inflated GDP, it can happen, if the company's accountant knows how to "cook the books", and do inacurate reposting in order for the company to pay less taxes. It is illegal but sometimes happen.
      (33 votes)
  • leaf green style avatar for user karan shah
    So this could mean the GDP could be negative?
    If I value of an unfinished good at the end of a period is say $100 and the price comes down to $80 in the next term, then the GDP of the next term in question would be negative!
    (10 votes)
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    • leaf green style avatar for user Austin Jones
      GDP cannot be negative at any time. The growth rate of GDP can be negative, this leads to recession and depression cycles. Economists sometimes say two consecutive quarters of negative GDP growth is called a recession and four consecutive is depression.
      (21 votes)
  • leaf green style avatar for user iLive2Learn
    What happens, let's say in a business:
    Total expenses for the year : 560,000
    Total Revenue for the year: 520,000
    What would we add to the GDP? 560k or 520k or do we add -40k?
    Thanks in advance
    (9 votes)
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  • orange juice squid orange style avatar for user Robert Kacir
    In practical terms how do governments apply these principles when measuring GDP for official statistics? They could not track individual products. Is measured GDP revenue of the firms in a nation? If so does that miss several aspects of GDP (i.e. the incomplete products in warehouses that are now considered expenses that will later generate revenue)?
    (4 votes)
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    • leafers ultimate style avatar for user Andris
      As you point out there are several flaws in the measurement of the GDP, but it is still the best measure economists could come up with.

      I am not sure what you mean by individual products. All products are measured that can be measured (all firms, big and small alike, have to tell the government how much they produced, so that can be measured). The black market (selling of guns, drugs, etc...) are not measured evidently, because no knows the exact amount of those transactions. The products made and consumed at home (like vegetable from the garden) are not counted either for similar reasons. All other products are counted and part of GDP.
      Incomplete products are part of GDP as well, firms have to evaluate how much those products are worth, and later compensate by the real market value if they are sold.
      (2 votes)
  • orange juice squid orange style avatar for user Hèlen Grives
    That sounds all nice, but what if people wait for the sale to buy their goods. Then the market value is more of a wanted value than the actual market value of the consumer. The market value has a bit of a bias in it. Especially considered dumping goods on the market. Those good have a market value below their own market value.
    (4 votes)
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    • piceratops ultimate style avatar for user Emi
      The market value is set by the buyers--it is the price people are willing to pay for an item. For test questions, etc. it will be simplified, but in reality market value is very complicated and changes from day to day and person to person. The prices companies set are what they think people will want to pay--it's just a guess. When things go on sale, it means the company guessed too high. When things sell out, the company probably guessed too low.

      *TL;DR: The market value is absolutely the "wanted value" and has less to do with the price a company puts on its goods.*
      (1 vote)
  • blobby green style avatar for user Takuya  Matsuo
    How can I know whether a good is a intermediate good or a final goods?
    (3 votes)
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  • leaf green style avatar for user Divyang Chauhan
    when an entity use labor and produce goods whose value is less than the labor and raw material combined then what happens? value of final product gets counted in GDP or value of labor and raw material?
    (3 votes)
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    • purple pi purple style avatar for user Qian Sue
      If the value of final product is less than the labor+raw material, then it simply means someone (factory owner) is losing money. In this case, his/her profit is a negative number. Therefore, we have value of final goods = factory expense (which is labor + raw material) + profit of the owner. And that's the value get counted in GDP.
      (2 votes)
  • leaf green style avatar for user jamesd116
    I am not sure that this would get answered seems like this is 4-5 yrs old. Here is what I am confused at. You have 4 different companies in the US Cotton, Thread, material, clothing(jeans).
    All of these different companies have their own final product they do not care about the next man. So why would these other companies not report a GDP on their final product. The cotton manufacturer why is he not going to have a GDP (I understand that it will double or triple the numbers.) But they did produce something and sell it. then the same with the thread manufacturer and so on.
    In the end they all have their own final product.
    (3 votes)
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    • piceratops ultimate style avatar for user Nusaybah
      It is because we are not looking at the final product of the particular company. We are looking at the final product from the point of view of the ECONOMY. Those jeans aren't going to be turned into something else. They are going to be sold and be worn. So, in the eyes of the economy, the final good is the jeans, not the cotton, thread or cloth.
      Hope this helps.
      (2 votes)
  • male robot hal style avatar for user Luke
    If part of the proses of making a good was done in another country, how would this affect GDP. For example, if the cotton was grown in a different country and then sent here for the jeans to be completed, or if the cotton was grown in the United States and sent to a different country to be manufactured, how would that change GDP?
    (2 votes)
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    • ohnoes default style avatar for user Tejas
      If the cotton were grown in another country, then we would take the amount of jeans produced multiplied by its price, and then subtract out the amount that the United States paid for the cotton. If it were the other way around, we would just take the amount that the United States received for exporting the cotton.
      (3 votes)

Video transcript

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.