Question

Last year, a small nation with abundant forests cut down 200 dollar worth of trees. It then turned 100 dollar worth of trees into 150 dollar worth of lumber. It used 100 dollar worth of that lumber to produce 250 dollar worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in producing trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the value of the final goods the nation produced including trees, lumber and bookshelves?

Short answer

The nation's GDP is 450 dollars, which includes the value of the final goods: trees (200 dollars) and bookshelves (250 dollars). Lumber is considered an intermediate good and is not included in the GDP calculation.

Step-by-step solution

Identify the final goods produced by the nation

In this case, the final goods produced by the nation are trees, and bookshelves. Lumber is considered an intermediate good as it's used as input to produce bookshelves.

Calculate the value of trees

The value of trees cut down by the nation is given as 200 dollars.

Calculate the value of bookshelves produced

The value of bookshelves produced using 100 dollar worth of lumber is given as 250 dollars.

Add the value of final goods to calculate the GDP

Now, add the value of trees (200 dollars) and bookshelves (250 dollars) to find the nation's GDP. \[ GDP = Value\_of\_Trees + Value\_of\_Bookshelves \newline GDP = 200 + 250 \]

Calculate the GDP

Now we can calculate the nation's GDP: \[ GDP = 200 + 250 \newline GDP = 450 \] So, the nation's GDP is 450 dollars, as it includes the value of the final goods: trees and bookshelves.

Key concepts

Final Goods and Services

Final goods and services refer to products that have reached the endpoint of economic activity; in other words, these are items that are ready for consumption by the end-user or investor, with no further transformation needed. This is an essential concept in the computation of Gross Domestic Product (GDP), a critical macroeconomic indicator.

For instance, in our textbook exercise, trees and bookshelves are considered final goods. The trees are part of the final market transaction within the nation's borders in the given year, and similarly, the bookshelves are the end product sold to consumers or businesses. The value of these final goods is directly included in the GDP calculation.

Understanding the differentiation between final goods and potentially reusable intermediate goods is crucial, as including only final goods ensures that we do not count the same value multiple times within the GDP, avoiding overestimation of a nation's economic output.

Intermediate Goods

Intermediate goods are products used as inputs in the production of final goods or services. These are not counted separately in GDP calculations because their value is subsumed within the value of the final products.

In the context of our example, lumber is an intermediate good. It is a product intermediate in the production process, transformed into bookshelves which are the final good. While the value of the lumber is significant for internal accounting and production process purposes, for GDP calculation, only the value of the final bookshelves is considered to avoid double-counting. This careful distinction between types of goods is integral to accurate national income accounting.

Macroeconomic Indicators

Macroeconomic indicators are statistics that signal the current status of the economy of a state or region. These indicators are used by economists, policymakers, and researchers to interpret economic performance and to inform decisions and policy. Among the most important indicators is Gross Domestic Product (GDP), which is a measure of the market value of all final goods and services produced in a country during a specific period.

GDP, inflation rates, unemployment rates, and balance of trade figures are some common macroeconomic indicators that offer insights into the health and trajectory of the economy. In our example, the nation's GDP serves as an indicator of its economic size and performance, using the sum of values of final goods – specifically trees and bookshelves – to quantify economic activity.

National Income Accounting

National income accounting is a system used by governments to measure the economic activity of a country. This accounting framework aggregates the production output, income, and expenditure of a nation's economy. GDP is one of the primary measures within this system, providing a monetary value for all the finished goods and services produced within a country's borders in a specified period.

The problem from our textbook illustrates a straightforward scenario of national income accounting by calculating a nation's GDP. We sum the monetary values of final goods—trees at \(200 and bookshelves at \)250—ignoring intermediate goods like lumber. This results in a GDP of $450 for the nation. The national income accounting process is more complex in real-world scenarios, involving numerous adjustments and considerations to accurately reflect the economic activity.