If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:2:50
MEA‑1 (EU)
MEA‑1.A (LO)
MEA‑1.A.3 (EK)

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 of the land we get the cotton the market value of that is ten dollars at raw cotton and then we're able to turn that into thread with the market value of twenty dollars and we keep going and keeping we keep on going and going all the way until we get the finished product of jeans which has a market value of fifty dollars we saw that 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 all of these intermediary goods but that probably raised a question in your head what if all of this does not happen in a given year what if 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 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 twenty dollars worth thread 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 well what happened is is in period one we would look at this good this intermediary good that sitting in someone's inventory someplace that's getting ready to be used to get more finished we would use we would say this is the contribution to GDP this is the contribution 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 twenty dollars twenty dollars and then in period two the contribution won't be just the value won't just be the fifty dollars so we do get to a point that the jeans are worth fifty dollars but so that we haven't double counted the same twenty dollars in both period one and period two will subtract out what our starting point was or we will start will subtract out the contribution the intermediary products that were already counted in previous periods or you could say well startup will subtract out the market value of the inputs at the beginning of that period so you'd say $50 - $50 - 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 2 would be $30