The Calculation of GDP in Economy X

Understanding GDP Calculation

Gross Domestic Product (GDP) is a key indicator used to measure the economic performance of a country. It represents the total monetary value of all final goods and services produced within a country's borders in a specific time period, usually a year. GDP is calculated by adding up consumption, investment, government spending, and net exports (exports minus imports).

Suppose the total market value of all final goods and services produced this year in economy X is $4 million. Of the $4 million worth of goods, $3 million is sold and $1 million is held in inventory. For this year, the GDP for economy X is

a. $4 million.
b. $3 million.
c. $1 million.
d. $7 million.
e. none of the above,

Question:

What is the GDP for economy X based on the provided data?

Answer:

A) $4 million

Explanation:

The GDP is worth $4 million because GDP equals the sum of all produced goods and services in a given year within a country. Inventories are part of GDP, counted as private investment, even if they are not sold. The reason for this is that firms paid someone for the inventory with the aim of earning a profit in the future, and assets that are purchased with the goal of getting economic benefit from their use are qualified as investments.