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Chapter 19: Q. 14 (page 470)

Why must you avoid double counting when

measuring GDP?

Short Answer

Expert verified

Double counting should be avoided as the reported GDP can be more than the actual amount of production.

Step by step solution

01

Step 1. Introduction

When the cost of inputs utilized in the production of final goods and services is included in the calculation of GDP, the problem of double counting occurs. This is because the value of inputs utilized in the manufacturing of a product is included in the ultimate price of goods and services.

02

Step 2. Conclusion

If the price of inputs is taken into account while calculating GDP, the reported GDP will be higher than the actual quantity of production.

03

Step 3. Example

For example, the gross domestic product (GDP) is calculated based on the sale of a shirt in a store. However, it does not account for the cost of thread and cotton. This is due to the fact that all of those inputs are counted at the point of sale.

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Most popular questions from this chapter

Is it possible for GDP to rise while at the same time per capita GDP is falling? Is it possible for GDP to fall while per capita GDP is rising?

Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living.

a. The environment becomes dirtier

b. The crime rate declines

c. A greater variety of goods become available to consumers

d. Infant mortality declines

The Central African Republic has a GDP of 1,107,689 million CFA francs and a population of 4.862 million. The exchange rate is 284.681CFA francs per dollar. Calculate the GDP per capita of Central African Republic.

The “prime” interest rate is the rate that banks charge their best customers. Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years would it have been best to be a lender? Based on the nominal interest rates and inflation rates in Table 19.10, in which of the years given would it have been best to be a borrower?

Should people typically pay more attention to their

real income or their nominal income? If you choose the latter, why would that make sense in today’s world? Would your answer be the same for the 1970s?
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