ChCH. 5 Measuring the nation’s output.ppt

Measuring a nation’s output Having a number that summarizes the level of economic activity is clearly convenient Alternative would be to see how much of each type of good is available But then it is hard to compare One year output is 2 apples, 2 bananas Next year 3.5 apples, 1 banana Did output go up or down? Not clear!! How would you measure a nation’s output? Gross domestic product Most frequently used measure of an economy’s output Definition: GDP is the market value of the final goods and services produced in a country during a given period Computing GDP (Example) The GDP produced in a typical night in SoBe 100 people go to a nightclub (cover is $20 each) 100 go to the new world orchestra ($40 dlls per ticket) 300 rolls of sushi are prepared ($15 per roll) 50 gallons of orange juice are consumed ($5 per gallon) Computing GDP (Example) A typical night at southbeach 100 nightclub (times $20) 100 orchestra (times $40) 300 rolls of sushi (times $15) 50 gallons of OJ (times $5) $2000 +$4000 +$4500 +$ 250 GDP=$10750 Important remarks When computing GDP more expensive items receive a higher weight than cheaper ones Is that reasonable? Idea behind it: Amount people are willing to pay is an indication of the benefit they receive Important remarks (2) Only final goods are counted in GDP We did not include (to name a few) The DJ wages paid by the nightclub The wages of the musicians of the orchestra The ingredients needed for sushi: Fish, rice, wasabi Oranges purchased to prepare OJ Definitions: Final vs intermediate goods A final good is the end product of a process and it is the good or service that consumers actually use The goods or services produced on the way towards making the final product are called intermediate Why GDP includes only final goods? If we computed GDP by adding market value of final + intermediate goods we would be double counting Oranges (intermediate good) are purchased to produce juice (final good) and the final good price includes