lesson

Gross domestic product (GDP)

After you have worked through this section of the learning unit, you should be able to:

define gross domestic product (GDP) and explain the significance of each component of the definition
distinguish between final goods and intermediate goods
distinguish between consumer goods and capital goods
define gross geographic product (GGP)
Identify problems associated with GDP

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Study Instructions

Study chapters 2.3 and 2.7 of the textbook.

Watch the video clip on gross domestic product.

Do the activities.

Introduction
Activities

Introduction

The gross domestic product (GDP) is a central concept in the national accounts and an important indicator of the performance of an economy. The concept will be used extensively in the rest of the learning unit. Make sure that you have a very good understanding of this concept and its meaning.

Meaning of Gross Domestic Product (GDP)

Watch the following video clip from the beginning to 2:52 minutes for the meaning of some of the components of GDP:

Gross Domestic Product (GDP): Activities

1. GDP is obtained by adding up the quantities of all the final goods produced in the economy during a particular period.

True

Incorrect. The statement is false.

GDP is obtained by adding together the monetary value of the final goods and services produced. For instance, in South Africa it is the rand value of all the new cars produced plus the value of all the food plus the value of services, etc.

False

Correct. The statement is indeed false. GDP is obtained by adding together the monetary value of the final goods and services produced. For instance, in South Africa it is the rand value of all the new cars produced plus the value of all the food plus the value of services, etc.

2. Both consumer goods and capital goods are final goods.

True

Correct. The statement is indeed true. Final goods are used or consumed by individuals, households and firms and are not processed further or resold. Consumer goods are those goods that are consumed by households and the government sector. Capital goods such as machines, equipment and buildings are used by firms and the government to produce other goods. Capital goods are neither processed further nor resold.

False

Incorrect. The statement is true. Final goods are used or consumed by individuals, households and firms and are not processed further or resold. Consumer goods are those goods that are consumed by households and the government sector. Capital goods such as machines, equipment and buildings are used by firms and the government to produce other goods. Capital goods are neither processed further nor resold.

3. Intermediate goods are part of final goods.

True

Incorrect. The statement is false. Intermediate goods are purchased to be resold or used as inputs to produce other goods.

False

Correct. The statement is indeed false. Intermediate goods are purchased to be resold or used as inputs to produce other goods.

4. Included in the value of final goods is the value of the intermediate goods used.

True

Correct. The statement is indeed true. For example, the value of the flour used by the baker (an intermediate good) to bake bread is included in the value of the final loaf of bread. That is why only the value of the final good (bread) is counted.

False

Incorrect. The statement is true. For example, the value of the flour used by the baker (an intermediate good) to bake bread is included in the value of the final loaf of bread. That is why only the value of the final good (bread) is counted.

5. The output produced by foreigners living in South Africa is part of the GDP of South Africa.

True

Correct. The statement is indeed true. GDP is the total value of all final goods and services produced within the geographical borders of a country, irrespective of who produced them.

False

Incorrect. The statement is true. GDP is the total value of all final goods and services produced within the geographical borders of a country, irrespective of who produced them.

6. A product that was produced in 2019 but sold in 2020 is part of the GDP for 2020.

True

Incorrect. The statement is false. GDP only includes the value of goods and services produced during a particular period. A product that was produced during 2019 but sold in 2020 is part of the GDP for 2019 and not part of the GDP for 2020.

False

Correct. The statement is indeed false. GDP only includes the value of goods and services produced during a particular period. A product that was produced during 2019 but sold in 2020 is part of the GDP for 2019 and not part of the GDP for 2020.

7. Included in the GDP is provision for depreciation.

True

Incorrect. The statement is false. The word “gross” indicates that no provision has been made for depreciation.

False

Correct. The statement is indeed false. The word “gross” indicates that no provision has been made for depreciation.

8. GDP is the total value of all goods and services produced within the borders of a country.

True

Incorrect. The statement is false. It is only the value of final goods and services that is used to calculate the GDP.

False

Correct. The statement is indeed false. It is only the value of final goods and services that is used to calculate the GDP.

9. An increase in the level of economic activity will be reflected in an increase in GDP, and a decrease in the level of economic activity will be reflected in a decrease in GDP.

True

Correct. The statement is indeed true. The GDP is an important measure of the level of economic activity. An increase in economic activity is usually reflected in an increase in GDP and a decrease in economic activity as a decrease in GDP.

False

Incorrect. The statement istrue. The GDP is an important measure of the level of economic activity. An increase in economic activity is usually reflected in an increase in GDP and a decrease in economic activity as a decrease in GDP.

10. The following data is for a hypothetical country. Use this data to calculate the GDP of the country.

Value of consumer goods imported from the rest of the world: R22 billion

Value of consumer goods produced by foreigners living in the country: R12 billion

Value of intermediate goods produced in the country: R50 billion

Value of capital goods such as tractors imported from America: R5 billion

Value of consumer goods produced by citizens living in the country: R100 billion

Value of motor cars produced the previous year but only sold this year: R8 billion

Value of capital goods such as welding machines produced in the country: R18 billion

Provision for depreciation on capital equipment: R3 billion

Click to Show Answer

The following items form part of the GDP:

Item	R billion
Value of consumer goods produced by foreigners living in the country	12
Value of consumer goods produced by citizens living in the country	100
Value of capital goods such as welding machines produced in the country	18
GDP	130

The following items do not form part of the GDP:

Value of consumer goods imported from the rest of the world: R22 billion
Value of intermediate goods produced in the country: R50 billion
Value of capital goods such as tractors imported from America: R5 billion
Value of motor cars produced the previous year but only sold this year: R8 billion
Provision for depreciation on capital equipment: R3 billion

Concepts

Capital goods

Capital goods are human-made goods that are used by firms or the government to produce other goods. Examples include machinery, equipment, buildings, dams, roads and bridges.
Consumer goods

Consumer goods are those goods that are consumed by households and the government sector.
Final goods

Final goods are goods that are used or consumed by individuals, households and firms and not processed further or resold. Included in final goods are capital goods.
Gross domestic product

Gross domestic product (GDP) is the total value of all final goods and services produced within the geographical borders of a country in a particular period.

Total production, income and expenditure

Three approaches to the measurement of GDP

Glossary

Introduction

Meaning of Gross Domestic Product (GDP)

Watch the following video clip from the beginning to 2:52 minutes for the meaning of some of the components of GDP:

Gross Domestic Product (GDP): Activities

1. GDP is obtained by adding up the quantities of all the final goods produced in the economy during a particular period.

2. Both consumer goods and capital goods are final goods.

3. Intermediate goods are part of final goods.

4. Included in the value of final goods is the value of the intermediate goods used.

5. The output produced by foreigners living in South Africa is part of the GDP of South Africa.

6. A product that was produced in 2019 but sold in 2020 is part of the GDP for 2020.

7. Included in the GDP is provision for depreciation.

8. GDP is the total value of all goods and services produced within the borders of a country.

9. An increase in the level of economic activity will be reflected in an increase in GDP, and a decrease in the level of economic activity will be reflected in a decrease in GDP.

10. The following data is for a hypothetical country. Use this data to calculate the GDP of the country.