Question

1. Why do economists include only final goods and services in measuring GDP for a paticular year? Why don't they include the value of used goods i.e. cars, furniture, etc., bought and sold?

2. Define net exports. Explain how U.S exports and imports each affect domestic production. How are net exports determined? Explain how net exports might be a negative amount.

Answer 1

1. Only final goods and services are included in GDP to prevent double counting. In the sense that if we include intermediate goods as well then their value would be included in the intermediate stage as well in the final stage. This would be wrong. The value of used goods should not be included as they have been included in GDP before and the value add through which the good has been made has not happened in the current year but only past years. Only new goods should be included in current year GDP.

2. Net exports is defined as the difference between exports and imports. This forms the balance of trade. US exports if they increase will mean that foreigners are bying more domestic good and so this will mean that domestic production will increase. An increase in imports will mean that domestic residents purchase foreign goods and not domestic goods and so this causes a dent in domestic production and the purchase of domestic goods falls. Net exports are given as the difference between exports and imports. In the event that total imports exceed the inflow from exports then the net exports will be negative. This will denote a negative balance of trade.