Question

1a. Explain why are intermediate goods excluded from the GDP calculation.

1b. Explain the difference between Nominal GDP and Real GDP.

1c. Explain why do we add exports and why do we subtract imports when calculating the GDP.

2. Calculate the multiplier based in each of the situations below and comment on your answers as you move from point a to point f (what happens to the multiplier?).

MPS = 0.15

MPS = 0.20

MPS = 0.30

MPS = 0.40

MPS = 0.50

MPS = 0.60

.

Answer 1

1A. GDP includes only the final goods produced in an economy in a given year. It does not include intermediate goods and the value of the intermediate goods are already included in the final goods. So, separately including the intermediate goods in GDP would result in double counting. For example, the textile is an intermediate good and garment is a final good. So, GDP includes only garments. If GDP includes both garments and textiles, it would lead to double counting as textiles have been used in the production of garments and the market value of garments already include the market value of textiles which has been used as an intermediate good in the production of garments.

1B. Nominal GDP is the market value at current prices of all final goods and services produced in an economy in a given year. Real GDP is the market value at constant prices of all final goods and services produced in an economy in a given year. Therefore, nominal GDP does not take inflation into account whereas real GDP takes inflation into account.

1C. When goods are imported, the goods are either domestically consumed or they are re-exported as it is or after value addition. Therefore, 'Consumption' and 'Exports' already include imports, which are not domestically produced. GDP includes only hat is domestically produced. That is why import is subtracted and export is added to GDP.