Calculating Real GDP, Inventories and Imputations

Calculating Real GDP:

Real GDP is computed by adding up the cost of all final goods and services made in the economy. Since it measures the rate at which goods and services are produced, Real GDP is a flow variable. It’s generally expressed as an yearly amount. Frequently, you won’t hear the phrase "every year." But when you hear that Real GDP in the 4th quarter of year 2002 was such and such, keep in mind that such a statement means that flow of production in the 4th quarter was such and such every year. And when you listen that Real GDP in the 4th quarter of 2002 grew at so and so a percent, consider that such a statement means that real GDP in the 4th quarter grew at so and so a percent per year, the difference between Real GDP in the 3rd quarter and Real GDP in the 4th quarter is just one-quarter of the reported yearly growth rate.

Real GDP:

Sixth and last of the key economic variables is real GDP. Other variables are close cousins of real GDP: NNP (Net National Product), GNP (Gross National Product), NDP (Net Domestic Product), and NI (National Income). And you will listen commentators referring to ‘total production,’ ‘total output,’ ‘National income,’ ‘Total income,’ and ‘National product.’ Except when you are focusing explicitly on details of the ‘National Income and Product Accounts [NIPA]’, treat all these words as synonyms for real GDP.

What are the final goods and services that structure GDP? A final good or service is something which is not used anymore in production during the course of that year. So final goods and services include:

a) Everything bought by the government.

b) Everything bought by businesses not as an input for further production, but as an investment to increase the business's capital stock and expand its future production capacity.

c) Everything bought by consumers.

Since GDP measures product and not spending, it comprises a balancing item, exports subtracts imports. Since imported goods purchased by customers, installed as pieces of investment, or purchased by the government weren’t made in the U.S., they are not a part of Gross Domestic Product, and so imports need to be deducted from GDP. Since exported goods purchased by foreigners were made in the U.S., they are the part of GDP, and need to be added to total.
Intermediate Goods

GDP is termed as the market value of final goods and services produced. Therefore so called "intermediate goods" which means goods sold to another commerce for use in further production, are not included in GDP. A product prepared by one business and sold to other will ultimately show up in the ‘National Income and Product Accounts’ [NIPA] and be counted as part of GDP. It will appear when the second business trades its product (which will by then embody the value added by first producer) to a customer, an investor, a foreign buyer, or the government. In the meantime, Since the value of an intermediary good is incorporated in the price of the ultimate good which the intermediary good is used to make, its cost should be excluded from GDP.

Example: if a builder purchases wood from a lumber mill to construct a house, the cost of the wood becomes part of value of house. To count the value of timber once more, to comprise the sale of wood to the home builder and the sale of the newly constructed house to its buyer would be to count the wood two times. And what would happen if the constructer purchased the lumber mill, so that he/she no longer had to purchase finished would? GDP must not go down only because two industries have merged.


What would happen if the production procedure is not over when end of the year rolls around, and ‘Commerce Department's Bureau of Economic Analysis’ closes the books on that year's GDP calculation? Some intermediary goods won’t have been used to manufacture goods for finishing sale. The value has already been added in producing the intermediary good, but no ultimate good that embodies that value has yet been sold. The NIPA finesses this difficulty by treating inventories at the end of a phase as a unique kind of final good, a form of investment. A commerce that makes intermediate goods or final goods and does not sell them by the end of the annum is considered as having "purchased" those merchandise for itself as part of its resources stock. The common rule is that whenever a business raises its end of period inventory, that increase is counted as an element of investment, and of final demand.


What about merchandise and services that are produced and used but not traded in the market? Such merchandise and services lack prices and bazaar values; how are they counted in GDP? In a number of cases nationwide income accounts approximate, they guess, really what merchandise or services would have sold for on the marketplace if there had been a market.

The major such "imputation" in the NIPA is found in accommodation. When someone rents an apartment or a residence, the rent they pay to the property-owner becomes part of GDP as the purchase of "housing services" by the tenant. When a landowner rents a house to a renter, he or she is selling a service which is the usefulness of having their roof over the tenant's head, just as much as a barber is providing a service when a client gets a haircut. So rent is one item in consumer spending on services.

Accountants enter it as an element of expenditure in the FIRE (finance, insurance, and real estate) sector, a big component of consumer demand.

Though,  more than half of Americans own their personal houses and are their own landlords.

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