Ten Principles of Economics - Part 49. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 22 MEASURING A NATION S INCOME 497 drugs. It also excludes most items that are produced and consumed at home and therefore never enter the marketplace. Vegetables you buy at the grocery store are part of GDP vegetables you grow in your garden are not. These exclusions from GDP can at times lead to paradoxical results. For example when Karen pays Doug to mow her lawn that transaction is part of GDP. If Karen were to marry Doug the situation would change. Even though Doug may continue to mow Karen s lawn the value of the mowing is now left out of GDP because Doug s service is no longer sold in a market. Thus when Karen and Doug marry GDP falls. FINAL . . . When International Paper makes paper which Hallmark then uses to make a greeting card the paper is called an intermediate good and the card is called a final good. GDP includes only the value of final goods. The reason is that the value of intermediate goods is already included in the prices of the final goods. Adding the market value of the paper to the market value of the card would be double counting. That is it would incorrectly count the paper twice. An important exception to this principle arises when an intermediate good is produced and rather than being used is added to a firm s inventory of goods to be used or sold at a later date. In this case the intermediate good is taken to be final for the moment and its value as inventory investment is added to GDP. When the inventory of the intermediate good is later used or sold the firm s inventory investment is negative and GDP for the later period is reduced accordingly. GOODS AND SERVICES . . . GDP includes both tangible goods food clothing cars and intangible services haircuts housecleaning doctor visits . When you buy a CD by your favorite singing group you are buying a good and the purchase price is part of GDP. When you pay to hear a concert by the same group you are buying a service and the ticket price is also part of GDP. PRODUCED . . . GDP .
