How is the Economy doing?

How is the Economy Doing?

What is the difference between a final good and an intermediate good? Give one example of each. How are they treated in GDP calculations?

Final good is the good which is directly consumed by the consumer. Intermediate good is used in making in other products. Sugar is an intermediate good as well as final good. Sugar is used by end consumers e.g. households. Sugar is also used in production of other goods for e.g. Cakes, Juices and etc. Thus Sugar as intermediate goods will be excluded from the calculation of Gross Domestic Product and final good is treated by using value added approach (Investopedia (3), 2012).

Example: Sugar sold by sugar-cane sold to sugar producer at the rate of $100. Sugar producer sells sugar to Baker after adding a value of $100 at the price of $200. Baker uses the sugar in Cake and sells it for $300 after adding the value of $100. Thus total cost of final good is the value addition at each stage i.e. 100 + 100 + 100 = 300.

Give some reasons why real GDP is not an adequate measure of a nation's well being. Despite these limitations, do you think real GDP is a useful statistic? Explain your answer.

Reasons for inadequacy of Real GDP of nations well being

Food grown by households is consumed at home and is not included in GDP.

Home Improvement projects are not considered the part of GDP

Drug transactions and illegal transactions are not calculated in GDP. Although they are produced and sold domestically thus they should be include in the production. They also create negative externalities by polluting the environment as well affecting the well being.

Sale of Stock and Bonds are not counted in GDP calculation. Sale of stock and bonds create capital gains, which means more money is created in the economy and goes unnoticed.

Used goods are not GDP calculation although they are purchased by people.

Value of leisure is not included in GDP calculation although it makes people more productive over period of time.

GDP doesn't include people well being because if people work longer hours that might degenerate their health.

Social costs or negative externalities are passed onto others should be subtracted from the GDP because it affects the well being of the individuals in the society.

It excludes the harmful items which are consumed within society other than drugs.

It ignores the income distribution within the economy. Unbalanced income distribution leads to inefficient well being (Reff and Brunelle, 2007).

Yes I think GDP is a useful statistic because it measures all the consumption of goods and services produced in the country. The GDP figure can then be used to compare country performance with other countries because it's a consistent method to measure country performance across the globe in different economies. Through measuring the trends country's performance can be compared across the years. GDP accounts for changes in the production incurred in the country which can report actual performance of the ...