1 us real gdp is substantially higher today than it was 60...

1) U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell you, and what does it not tell you, about the well-being of U.S. residents? What are the limitations of the GDP as a measure of economic well-being? Given the limitations, why is GDP usually regarded as the best single measure of a society's economic well-being? 2) What is an intermediate good? How does an intermediate good differ from a final good? Explain why is it the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP. 3) GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.

Transcript

00:01 All right.

00:02 So the first question is all about real gdp.

00:05 And you're told that real gdp has increased substantially in the u .s.

00:10 Over the last 60 years.

00:11 And that's a good thing.

00:14 And it's worth adding that it's not just that real gdp has increased, it's that real gdp per capita has increased.

00:21 And that's usually what we think of as a good measure of economic well -being.

00:29 Is adding in this per capita because of course if the u .s uh just annexed uh mexico tomorrow that would make our gdp go up i mean assuming there's no destruction right if we just took possession of it um and then mechanically the gdp of mexico would be added to the gdp of us and our new united states with you know now way more than 50 states um but that wouldn't increase the like the economic well -being of anyone on itself just you know adding adding the gdps together um so usually we add in this per capita but other than that uh a real gdp increase per capita is generally a good thing because it means that more stuff is is being um produced uh there are some limitations of real gdp uh per capita some of the big ones are that you're you don't count some uh good things you don't count anything about the quality of the environment or rights or privileges that citizens have in a country.

01:40 Gdp doesn't measure anything that has to do with economic inequality.

01:44 So if you had one person who was receiving all the benefits from the production in a country, if you had some sort of dictator, you could have high gdp in a country or even high gdp per capita in a country.

01:55 But if it's all going to one person, is that really better? so gdp doesn't measure that.

02:02 And sometimes it can count things that aren't exactly a good situation.

02:07 You know, the classic example is that if you break a window, then you have to hire someone to fix it.

02:14 That's going to increase gdp because the window, you're going to have the service of fixing it and then probably also the goods, the manufacturing of the window.

02:25 But that's not like a great outcome.

02:27 You know, if that were the way to increase prosperity, we would just break everything all the time.

02:34 And we would be, that would be us living in a wonderful world.

02:37 But of course, that's absurd.

02:40 So gdp can count some things that are not good, things that are done to ameliorate bad things.

02:48 So it's going to include, you know, you're going to count as part of government spending money that you spend on a war or on policing.

02:58 But, you know, ideally there'd be no crime and you wouldn't need police.

03:01 So you're counting some things that aren't exactly good things that you wouldn't want to have in your perfect, you know, utopia society.

03:11 But in general, it's still a very good measure of economic well -being.

03:15 Part of the reason why it's so good is that there's not anything that's, you know, really a better measure.

03:21 You can imagine things like surveys, you know, how do you feel about your economic situation that you could ask people.

03:26 But that's subjective and it's much better to have an objective figure that we can measure that can be consistently measured across countries and it's it's tractable to calculate it and so that's this is the big thing it has in its favor is that there's not really anything better there's limitations it's just a number and if you're going to boil down everything that happens in the country in a year as far as the economy down to one number of course you're going to leave things out and you're not going to have all the information that you would like but if you just had to have one number to summarize what's going on in an economy real gdp and in particular real gdp per capita is a very good number to have okay the second question is about intermediate goods so an intermediate good is a good that's used to produce another good the easy example is wheels that go onto new tires or a steering wheel um that goes onto a new car that's being produced so we don't count the steering wheel that's built into a new car.

04:33 And oftentimes they're produced by different companies or different firms.

04:38 We don't count that because when we count the sale of the entire car, as long as that occurs during the year, when we count the sale of the entire car, we're kind of counting within that the value of each of the component parts.

04:50 If the whole car is worth $40 ,000, then that includes the value of the steering wheel and every other little bit of that car.

05:02 So that's why we don't want to count non -final goods.

05:06 But there's the exception mentioned in this question.

05:10 There's a timing exception.

05:12 So if an intermediate good is produced but not used, we are going to count it.

05:17 And we're going to count it for the same reason that we would count a final good that is produced but not sold.

05:24 And that's because it's inventories...