Quiz 20: Measuring a Nations Wellbeing and the Price Level


a.A U.S. resident buys a new automobile manufactured in Japan-it falls under net export component of aggregate expenditure, as it is a component of imports to U.S. b.A household's purchase of one hour of legal advice is a component of private final consumption expenditure. c.Construction of a new house is a component of private fixed capital formation and thus is a component of investment. d.An increase in semiconductor inventories over last year's level is a component of net change in firm's inventories and thus falls under investment. e.A city government's acquisition of new police cars is a component of Government final consumption expenditure.

GDP, or gross domestic product, is a measure of the value of all final goods and services produced within a country during a specified period of time. Certain goods and services are excluded from the measurement for various reasons, as is investigated below. (a)These products are not produced domestically and are thus not counted in the gross domestic product. (b)GDP measures the value of all final goods and services produced in a given year. Thus, if a final product is produced in 2011, it will be counted in 2011's GDP, despite not being sold until 2012. Specifically, car parts that will be sold directly to consumers would count in GDP. However, if these were intermediate goods that will be assembled into a car, they would be excluded from GDP. (c)Government transfers, such as social security, are excluded from government spending and thus excluded from GDP. They do not directly reflect the value of any good or service.(d)When a restaurant firm, such as McDonald's, purchases food inputs, they are considered intermediate goods. Intermediate goods do not get counted in GDP to avoid double counting.(e)When a household purchases and consumes food, it is used as a final good. Thus, this would be counted in the GDP. (f)A foreign traveler in the United States will purchase goods just as any resident would. Specifically, this would get counted in GDP as an export.

Intermediate goods and services are used in a later production effort. For example, if an orange juice producer purchases oranges, they are counted as an intermediate good and the purchase is excluded from GDP. If it were included, double counting would occur such that the GDP reflects the values of the oranges and the value of the orange juice made from them. Intermediate goods will never be counted in GDP for the reason outlined above, however some services involved with them may be. Specifically, used items such as cars and homes are not counted in GDP when sold. They were already counted in a previous year's GDP when they were produced as new. However, if you hire a real estate agent or a car salesman to help the transaction, the payment for their services would be counted in GDP.

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