Chapter 5: Problem 15

If a surfboard is produced this year but not sold until next year, how is it counted in this year's GDP and not next year's?

Short Answer

Expert verified

Answer: The surfboard is counted in this year's GDP as a part of the unsold inventory (business inventories) which contributes to the change in inventories in the production approach of calculating GDP. The value-added from the production of the surfboard this year is included in this year's GDP. It is not counted in next year's GDP to avoid double-counting of goods and services since the value of the surfboard was already accounted for as a change in inventories in this year's GDP.

Step by step solution

Understand GDP

GDP is the value of goods and services produced within a country during a specific period (usually a year). There are three main approaches to calculate GDP: production, income, and expenditure approach. In this case, we will focus on the production approach.

Understand the production approach

The production approach, also known as the value-added approach, calculates GDP by summing the value added to goods and services at each stage of production. In the case of a surfboard, we will consider the value added during the production of the surfboard this year.

Calculate the value-added

First, we need to determine the value added to the surfboard during its production this year. The value-added can be found by calculating the difference between the cost of materials and the value of the surfboard after the production process.

Account for unsold inventory

Since the surfboard is not sold this year, it becomes part of the unsold inventory (also known as business inventories). In the production approach, changes in business inventories are accounted for while calculating GDP. So, the value-added from the production of the surfboard this year would still be included in this year's GDP as a change in inventories.

Understand why it is not counted in next year's GDP

When the surfboard is sold next year, the revenue generated will contribute to the income of the seller. However, this does not imply that the surfboard will be counted in the next year's GDP as well. GDP does not account for the double-counting of goods and services. Since the value of the surfboard was already accounted for as a change in inventories in this year's GDP, it won't be counted again in the next year's GDP.