The question states: Assume that we have a economy with no government and no cap

Question

The question states:
Assume that we have a economy with no government and no capital investment that is closed to the outside world.draw a simple circular flow diagram with just firms:downstream firms that product final goods and services for consumption, and upstream in production only intermediate goods that are used by downstream firms in production. Draw and discuss a circular flow of payments diagram in witch upstream firms and downstream firms are displayed separately.

What is double counting in calculation GDP?Explain why GDP does not equal total sales.

Whats the difference GDP and GNP ?

Explanation / Answer

1) Double counting of GDP occurs when the aggregate value of a product is greater than the value of a product. For instance, when determining the value of a leather shoe, the cost of the shoe may only be $3 after being made. However if we include the cost of the leather after it was produced at a leather factory (before being bought by the shoe manufacturer at $1) then GDP would account both the value of the leather factory in addition to the cost of the shoe after the shoe manufacturer is finished = $1+$3= $4. We have now double counted the shoe's value, reflected by a total of $4 instead of $3. $3 being the actual cost of the shoe. GDP does not equal total sales because GDP is compromised of many investments, private consumption, government spending, and the trade deficit. Specifically, final sales is GDP minus exports and inventory costs because GDP accounts for value from both domestic and foreign consumers, where as final sales only targets domestic consumers. 2) GDP is an acronym for Gross Domestic Product, while GNP stands for Gross National Product. GDP is the final market value of all products within a country, whereas, GNP would account for all the domestic firms and their international production values. For example, a GE plant in Germany would not be accounted for under GDP but would be accounted for under GNP

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