Question 2: (a) Which of the following are final goods and services and which are intermediate...

Question 2:
(a) Which of the following are final goods and services and which are intermediate goods and services? Please explain why in your answer. (4 marks – 1 mark each)
(i) A windscreen purchased by a motor vehicle spare parts supplier;
(ii) A new bulldozer to be used by a construction company;
(iii) A household cleaning service purchased by a family from a domestic cleaning service company;
(iv) Coking coal

(b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods and services is sold to domestic or foreign buyers.
Is this nation’s GDP $800 billion or $750 billion? Explain your answer.

(c) Explain why a new truck sold for use by a transport company is a final good, even though it is a fixed investment (capital) used to produce other goods.
Should the value of this truck then be added to GDP or should only the goods it transports be included in GDP?

Expert Solution

Final goods and services are those that are used for final consumption, whereas intermediate goods and services are those that are used up in the production of final goods and services.

Part 1) A windscreen purchased by a motor vehicle spare parts supplier is an example of final goods and services as it is being purchased by the supplier to be sold to the final consumer of the goods which are vehicle owners.

A new bulldozer to be used by a construction company is an example of final goods and services because it has been purchased by the construction company for capital formation or investment.

A household cleaning service purchased by a family from a domestic cleaning service company is an example of final goods and services as the family is the final consumer of the services.

Coking coal is an example of intermediate goods and services because it is used for producing final goods like electricity.

Part 2) Gross domestic product (GDP) is the total value of the final goods and services that have been produced and sold in a country during a year. So, it does not include the value of the goods that have been produced but not sold. So, in the present case, the nation’s GDP will be $750 billion.

Part 3) Goods that are purchased by firms as part of capital formation or investment are included as final goods irrespective of their use. So, even though the new truck sold for use by a transport company is being used for transporting the final goods, its value should be included while calculating the GDP.

Rahul Sunny answered 1 year ago

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