isi

[anon_econ]

yea thta's what i'm saying. it shud b included in consumption and subtracted from imports. and -600 bcoz inventory investment is -600. u r running down ur inventories.

[AJ]

@Vasudha...

I typed sooo much......

and U wrote 3 lines...
and basically we are saying same things...

Mujhe time kam padega ME II section mein...!!!!! :P :)

[anon_econ]

hehehehe :)

[lovekesh]

Isn't consumption in expenditure approach of national accounting is expenditure on goods and services produced in the given period. If i take 600 as consumption, it was not produced in year 2, which should not form part of year 2 GDP. The idea of subtracting imports is to find the net expenditure on consumer goods and services produced in that year. And if your reasoning of adding 600 to consumption is correct , then using same logic, sale and purchase of old items will get included in year 2 GDP.

[ritu]

hi lovekesh....m not convinced that we should actually add value of imports in consumption but yes the value 600 should be added in consumtion coz it was nt sold the previous year....the person who stores it will get proceeds this year only so it shud be there in gdp of year2...but for import vala part m nt sure that why we shud add this in consumtn......:////

[aditi5000]

1. (a) Suppose in year 1 economic activities in a country constitute only production of
wheat worth Rs. 750. Of this, wheat worth Rs. 150 is exported and the rest remains
unsold. Suppose further that in year 2 no production takes place, but the unsold wheat of
year 1 is sold domestically and residents of the country import shirts worth Rs. 250. Fill
in, with adequate explanation, the following chart :

Year GDP = Consumption + Investment + Export - Import
1 750           0                   600              150       0    
2 -250            600            -600               0       -250


A sale out of inventory is a combination of positive spending (the purchase) and negative spending (inventory disinvestment), so it does not influence GDP. This treatment of inventories ensures that GDP reflects the economy’s current production of goods and services.
GDP is the value of CURRENT production, so no production means 0 GDP and imports means negative GDP.
I am so so so sorry for the confusion. But I referred to all this from a text book so now this is correct.

Imports may or may not be consumed by households/firms/G... the point is that they are from the 4th sector of the economy and they get accounted for only there. I know its tempting to add it to C by households but that's not the right way to account for it.

[lovekesh]

Y= C+I+G+NX
C= C(d)+C(m)
I= I(d)+I(m)
let g=0
Y= C(d)+C(m)+I(d)+I(m) +X- C(m)-I(m)
so, if imports are mentioned, they will be in C term as well. If you don't want to write it in your identity, then Y= C(d)+I(d)
C(d)=600
I(d)=-600
Y=0

[anon_econ]

lovekesh, should it be 0=850-600+0-250 or 0=250+0+0-250?

[aditi5000]

M won't be exclusively added to C. What if the question said 150 of imports of machinery? You would not add it into I by firms naa? So why should you add it into C by households? Plus we don't know whether the tshirts were consumed or not, they were simply imported - could even be intermediate goods for all we know. So they are accounted for as only -M in the GDP making GDP = -250

[anon_econ]

if machinery was imported i would include it in investment. and in case shirts r an intermediate good i would not include them in imports either. the question says residents have imported shirts. i think it means ppl bought them for wearing them :P. i guess u could mention the possibility of them being intermediate goods as a separate case.

[anon_econ]

hmm aditi u r saying u've seen this in a textbook..u must be right then. but i dont understand the logic :(
anyway thanks

[aditi5000]

yes exactly, gdp should exclude the value of stuff spent on foreign goods - in this case Rs.150

so gdp is simply -150. gdp is the value of current production - in this economy, not only has consumption not occurred but on top of that residents have spent money (which could have been spent domestically) on foreign goods so our gdp becomes -ve.

we can't add it and then subtract it and make gdp zero because then we are double counting.

this contrAsts with the case of selling of old stocks by firms in year 2. in this case, the stock becomes inventory in year 1 and then in year two its like they are disinvesting (at the time of sale) thats why it becomes -600... I hope this helps. Even i could be wrong but this is my understanding - based on the definition of gdp as current value of production... and of the segregation of the 4 sectors of the economy as hh, f, g and external ..

Refer to mankiw NI accounting - macroecon

[Mr. Nobody]

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[anon_econ]

aditi, i am in the process of getting convinced :P
but tell me 1 thing. u said : gdp is the value of current production - in this economy, not only has consumption not occurred but on top of that residents have spent money (which could have been spent domestically) on foreign goods so our gdp becomes -ve.

gdp is the value of current prodn-cool.
in the next sentence u r measuring gdp as current consumption according to me. dont u think so?

[anon_econ]

ram of course in reality gdp can never be negative. but reality has little to do with these stylized economies of isi :P
but even so i think negative gdp isnt making sense to me even here

[lovekesh]

Case I
when i add -600 into net inventory change and add nothing to C. In that case, what i just did that i added unsold goods in the previous year GDP and subtracted the same amount in next year GDP. Does it make sense?

Case II
i add -600 into inventory depreciation and 600 into the Counsumption. So, the net effect on year 2 gdp is zero. And it should be coz they were just all produced in last year. Now, should the GDP be -250. Why??
let's say x be the amount of shirts used for consumption and 250-x be used for investment.
Y= 600(d)+x(m) -600(for inventory) +(250-x)(m) -250
Y=0
Generally regarding inventory problems, let's say i bought some tyres for car manufacturing. Since i could not use em all, so it added to my inventory and added to country GDP.
In next year, i made cars and use those tyres i had at my disposal. so, in consumption spending which people spent on buying those cars, the amount of money they paid for that car also includes the cost of tyres. But the tyres were added in last year GDP. So, in order to avoid double counting, i subtract them from my inventory changes and thus avoid us the problem of double counting.
In our case, it's finished but unsold goods. so, in order to avoid double counting, i add them to consumption and subtract them from inventory changes. regarding imports, i add them to consumption and subtract them as imports which is equivalent to not mentioning them at all in our identity.
let's say shirts are for consumption
Y= 600+250(m) - 600 -250
Y=0
as it should be as the question said, there was no production in year 2.

[aditi5000]

gdp is the value of current production - in this economy, not only has consumption not occurred but on top of that residents have spent money (which could have been spent domestically) on foreign goods so our gdp becomes -ve.

purchasing power of the residents has reduced because they have spent their income on importing when in fact they could have spent it in our economy (had production taken place)...... by virtue of importing, domestic Indian income goes abroad - its like an opportunity cost our economy bears for not producing (i am saying this only for the sake of explaining - not to be taken literally) we remove the value of imports from gdp because it is a reduction of our production capacity! (just understnad the analogy)

like in a real country we won't have rs.600 as investment, 250 as improts and so on, we wont have gdp which is negative but this is just a make believe situation so hypothetically gdp can be -ve

[lovekesh]

Let's try the income approach
in year 2, company sold unsold goods. so, their income goes up.
Does it??
coz the same income was added to their account in last year GDP. so, i subtract that income from their inventory change. It make sense as i don't want to double count their income. regarding imports, since that income does not constitute national factor income, we don't bother.
Y=0

[Mr. Nobody]

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[lovekesh]

This is what i found on internet.

"The Gross Domestic Product or GDP of a country is a way of expressing the measure of all the economic activity that takes place in a country. It is the market value of all the products and services that are created within the borders of the country. There are many ways of calculating the GDP.

The GDP of a country cannot have a negative value as it is impossible that all the goods and services created in the country are sold for a negative value (something that implies that the producers actually pay the customers for everything that the customers buy.)"