Lecture 22

Some more rules for computing GDP are:

• To compute the total value of goods/services, the national income uses market prices.
• As mentioned earlier, used goods are not used in the calculation of GDP.
• How do we treat inventories? This depends on whether the goods are sold or if they spoil. If the goods are sold, then their value is included in the GDP. If they spoil, the GDP remains unchanged.
• Some goods are not sold in the market. So, we use their imputed prices instead (recall the example of a house someone owns and lives in).
• Intermediate goods are not counted in the GDP, only the final goods are.

Now, the calculation of real GDP fixes a certain base year. This is not good because prices may change drastically over periods of time and it is misleading to use the values from 10-15 years ago. Therefore, we shift the base year prices once in a while (every 5-10 years).