Calculating Gross Domestic Product for a Country
There are three ways to calculate GDP ( Gross Domestic Product ) for a country. First, however, two important terms must be defined:
Raw materials are materials that firms in a country use to manufacture goods. For example, wood is a raw material that us used in the production of tables.
Intermediate goods are products that serve as raw materials for the production of other goods. A screw (itself comprising iron as a raw material) is used as a raw material during the manufacture of cars. Intermediate goods are actually partially processed raw materials. Producers of intermediary goods usually sell them to other factories, which use these goods in the production of their own items.
Example of a Chain of Intermediate Goods
- Wheat is a raw material used to make flour. Flour is a raw material used to bake bread.
- Cotton is a raw material used to make thread. Thread is a raw material used to produce fabric. Fabric is a raw material used to manufacture trousers.
Definition of a Firm
- A firm is a general term for any organization that engages in business. An incorporated company (Inc.), a limited company (Ltd.), a partnership, and a sole proprietorship are all types of corporations.
Definition of finished goods
- Finished goods are goods sold to individual consumers, and which undergo no further transformation or processing, for example, bread and trousers. In the previous example, the flour mill produces intermediate goods, and the bakery produces finished goods