The answer given by the text is B. But why isn’t A correct? Is A incorrect because GDP also includes things like owner-occupied rent, which are calculated at so-called imputed values?
My follow-up question is: what is owner-occupied rent? The CFA text gives me this:
“when a household purchases a home, it is implicitly paying itself in exchange for the shelter. As a result, the government must estimate (impute) a value for this owner-occupied rent, which is then added to GDP.”
How is a household “implicitly paying itself in exchange for shelther”? Isn’t it purchasing it from a willing seller, so shouldn’t this be accounted for in GDP based on market value?
I think A gives approximate NI whereas GDP is as per Income approach NI+CCA+SD, so it is incorrect. Owner occupied housing is treated as a productive asset to the owner, which gives him economic benefits over the life of an asset. If he didn’t own the house then he would have to pay rent, which will be included in GDP. Since there is an economic benefits from owner occupied housing and so as to keep GDP measure indifferent between Tenant occupied and owner occupied, owner occupied housing is included.
A) The statement does not specify which kind of income it is, it says total income, so it wouldnt be GDP because part of the household and firms income goes as tax to the income of the goverment. This is like an overlapping income, so false.
B) This is the classical definition of GDP from the speding approach of measure, so if you don’t know this definition I suggest you to memorize it at all cost.
C) Again an overlapping problem. All market values is like prices but we have product overlapping here because it says resalable goods, so we are accounting double or triple prices to each product that is “good in process”. From the “Value Added” approach to measure GDP we can sum all value added to a raw material of each production stage, not the market value of each one. For example, the market value of a shirt is 50$ which would be accounted to GDP for a value of 50$ (this is the classical approach to measure GDP, just spending), but from the value added approach we must arrive to the same amount, lets say raw cotton value is 10$, production process 25$, retail 15$ so in total is 50$. However this statement argued that we must sum 10 + 35 + 50 = 95 to measure GDP, this is so wrong right?.
Truly I picked C at first. because it said reseable goods… “produced within the periode”, it didn’t say goods from previous periods sold at current one, well ! I didn’t get that reseable goods is synonym for intermediate goods . I get confused because I remembered that in shwesers we were talking about market value not “the value spent” … is there any difference between the 2 ?
What do you understand for resalable goods? Are those that are bought and then sold, one time or multiple times. The most important example is intermediate goods because they form part of a chain of production. Suppose I am a cement producer, so I sell cement bags. Those cement bags are then used in house construction. My cement bags have a market value (the current price) and houses also have a market price, but the market price of houses include the market value of cement, they are overlapped. GDP calculation does not overlap values, thats why GDP is the sum of final goods, not all goods produced in the economy (which would include raw materials and intermediate goods).
In this example, GDP wouldn’t be cement + house value, it would be just house value. This is how you proceed under the spending approach of the GDP calculation.
Another way is to calculate the value added at each stage. So it would be
GDP = cement value + (house value - cement value) = house value
Note that house value - cement value is the value added by the house producer.