17a, confusion over calculating GDP

CFA Level I
#1

I would like some clarification on what GDP means. My understanding is that GDP is the sum of all the goods/services that are produced, and this is used as a measuring stick of how big/strong/productive an economy is.

  1. Isn’t this misleading though? What if someone owns so much in assets they don’t have to work a day job or sell goods to others? What if there is a farmer in Wyoming who owns acres of land and lives off his crops every year? Doesn’t he have zero impact on the GDP since he’s only producing for his own personal consumption? Would your answer change if he gave someone a bag of potatoes in exchange for some lawnmowing services?

  2. Does GDP count things that are PRODUCED or things that are SOLD FOR CASH? So let’s for example that a film studio makes a bad movie like Kevin Costner’s Waterworld. The film studio pay to have 100,000 DVDS manufactured. Those 100,000 copies are sold to Best Buy at $3 each, for a total price of $300,000. Best Buy planned on selling 100,000 copies at $10 each (1 million USD), but can only sell 60,000 copies to retail consumers. They ended up making $600,000 with unsold 40,000 copies sitting in their warehouses. How would we calculate GDP in this case? Is the GDP 1 million because that’s the stick price of the finished goods, or is the GDP 600,000 because that’s what was actually sold?

  3. How does GDP take into account double counting for intermediate goods. So for example that Apple spends 100 dollars in computer parts to make a $300 iPad. How is GDP calculated when one iPad is sold for $300? I ask because the parts-maker is going to report 100 in revenue and apple is going to report 300 in revenue. So it looks like 400 dollars of finished product when it’s actually only 300.

#2

  1. Correct, if the farmer would completely self-subsistent, his activity would not be counted in GDP. The same goes for people that do DIY instead of hiring painters/builders.

  2. GDP = C+I+G+NX. GDP in this case would indeed be 1 million because the unsold inventory worth $400,000 is counted in investment. (Along with the $600,000 consumed by purchasers)

  3. Intermediate goods are not counted in GDP - only the price of all final goods is included.

#3

  1. okay but what if those inventories are never sold, and eventually get destroyed/dumped?

  2. how do the economics that calculate GDP know what an intermediate good is? Let’s say you own a bakery. If you go to Costco and buy some Nestle chocolate chips and use them to make a cake, then you know that the chocolate chips are intermediate goods and the cake you sold is the final good. The problem is that Nestle and Costco believe they have sold final goods as well. Am I right to say this?

#4

  1. It’s the same as if suppose you wanted to paint your house for christmas yourself, since you are not paying someone to do that job for you, it won’t be counted as GDP.

  2. Suppose if Best Buy decides to destroy their inventory. They would report that as a loss on the Income statement worth the carrying value of the inventory. After that they would be shredded and then as the company does not report them as inventory the next quarter, they would not show up as in GDP calculation.

  3. The final goods sold in the economy is included in the GDP calculation. So in you eg the Nestle choco chips are included in the GDP only if you brought them to make the cake for yourself (DIY). Suppose if you sold that cake then instead of that nestle chips the cost of cake would be included in the GDP (Where the Nestle chips would be an intermediate good and so are the cherries and eggs you bought from someone else)