The flows to and from the markets for goods and services represent the “real” economy, shown in the left side of the diagram, in green. The right side of the diagram, in blue, represents the “financial” economy.
What is the difference between final goods and services and intermediate goods and services?
A sale of a final goods and services: goods and services sold to the final, or end, user (purchaser = final user)
A sale of an intermediate goods and services: goods and services that are inputs for production of final goods and services. (purchaser ≠ final user)
What is the GDP?
The GDP, or Gross Domestic Product, is the total value of all final goods and services produced in an economy during a given period, usually a year. Only production that takes place within the borders of a country is included in GDP.
Explain the term aggregate spending.
The aggregate spending is the sum of consumer spending, investment spending, government purchases of goods and services, and export minus imports, is the total spending on domestically produced final goods and services in the economy. Which is basically the formula to calculate the GDP.
There are three ways to calculate the GDP. What are those?
Adding up total value of all final goods and services produced.
Adding up spending on all domestically produced goods and services.
Adding up total factor income earned by households from firms in the economy.
By measeruing the GDP as the value of production of final goods and services, it is important to exclude the value of intermediate goods and services. Explain why.
Because counting the full value of each producer’s sales would cause us to count the same items several times and artificially inflate the calculation of GDP.
The way to avoid double-counting is to count only each producer’s value added in the calculation of the intermediate goods and services it purchases from other businesses. That is, we subtract the cost of inputs – the intermediate goods – at each stage of the production process.