Final Good and Intermediate Goods and the difference between nominal GDP and real GDP

May 17, 2018 Business

Intermediate goods by definition are used as a raw material for further production of other goods for its manufacturer (Bouman, J., 2012). In the calculation of national income goods which are used for resale in the same year are also treated as intermediate goods (Bouman, J., 2012). An example of this would be cloth purchased for making a shirt by a dress making company.

Coal used by a factory is an intermediate good because it serves a purpose in moving toward a final product (Bouman, J., 2012). Intermediate goods are not counted toward the Gross Domestic Product because of the way investment is measured. The real issue is how we measure changes in business inventories, intermediate products are not sold so they are added to the inventory under investment. It moves out of inventory into a final good the next year and is subtracted from the inventory making the net effect zero (Bouman, J., 2012). Final Goods

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Final goods are the goods that are produced for consumption by a consumer or goods produced for investment by a firm or an individual (Bouman, J., 2012). These goods do not undergo any further production processes and once they become sold out they come out of the economic flow (Bouman, J., 2012). Many final goods can be used as intermediate goods as well. Sugar is a final good that is produced from the cultivation of sugar cane but a baker can put sugar into a cake or pastries putting the sugar through another process. Final goods can be put into two categories: Consumption goods

Capital goods
Consumption goods are goods that meet the immediate needs of the customer for example, pens, pencils, food and a radio (Bouman, J., 2012). Capital goods are goods which are meant for producing other goods but not for meeting the immediate needs of a consumer (Bouman, J., 2012). Machinery, plants, buildings, tools and tractors are some examples of capital goods (Bouman, J., 2012). Capital goods production is used to measure the Gross Domestic Product because they show the size of an economy; they are the goods that have been produced for that year. Government expenditure is the largest single category of GDP

False. Government expenditures are the second largest category of the GDP and account for approximately twenty percent of the GDP. This includes the total expenditures on the services and the goods by the local, federal and state governments. Examples of these purchases are the salaries of congressional representatives, military goods and the salaries of public school teachers. Nominal GDP uses current market prices and real GDP measures GDP using base-year prices

True. Nominal GDP does use the value of final goods and services evaluated at current year prices (NGDP2006 = Q2006 X P2006) and Real GDP is calculated using base year prices. Real GDP using the year 2008 would look like this: RGDP2008 = Q2008 X P2008. By using the prices from the base year the impact of the effect of rising prices on the GDP is eliminated giving us a real measure of the GDP. GDP increases if you purchase General Motors stock

False. In the United States the sales of stocks and bonds are not counted as financial transactions toward the GDP because these transactions involve sales of ownership or debt and do not spring directly from the production of final output (Schenk, R., 2012). The total of all transactions not counted is much larger that the size of GDP; the transactions of GDP are only a tiny fraction of total transactions of the economy. Define the rate of unemployment and identify three factors that may cause the natural rate to change over time

The natural rate of unemployment is the unemployment rate that occurs in even a healthy economy. Workers are always looking for a better job so there is a lot of hiring and switching from job to job so workers are sometimes unemployed (Amadeo, K., 2012). Factors that affect the natural rate of unemployment are: Frictional unemployment (People who move jobs for specific reasons) Structural unemployment (Workers that have been displaced by technology or a lack of opportunity) Surplus unemployment (Wages being set at a higher level that causes unemployment) Why do you think structural unemployment delays recovery more than does cyclical unemployment?

Cyclical unemployment is best described as an army recall after a big push by the government to cut numbers. Structural unemployment is all about relocating workers to a new industry (recycled workers) but also the decline of the industry that they belonged to. Cyclical unemployment rehires people instead of destroying an economical niche. The problem with structural adjustments is that the workers being used aren’t skilled in their new trade so that their level of production isn’t necessarily positive. Not only does the lack of production affect the economy but the permanent loss of jobs means that the unemployment rate goes up without new jobs being created. At least with cyclical adjustments the unemployment rate drops and the jobs that have been lost will be renewed at the end of the recession.

References:
Armadeo, K., (2012). Natural Unemployment Rate. Retrieved February 2, 2013 from www.useconomy.about.com/od/glossary/g/natural_unemplo.htm Bouman, J., (2012). Principles of Macroeconomics. “Unit 3: Gross Domestic Product”. Retrieved February 2, 2013 from http://www.inflateyourmind.com/pdfs/macroeconomics.pdf

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