GROSS DOMESTIC PRODUCT (GDP)
- the total market value
of all final goods and services produced in the economy
in one year.
MEASURING STICK FOR VALUE?
Current
market prices. If a gallon of milk sells this month for $2.00,
then it goes into the GDP cash register at $2.00. If next month
a gallon of milk (just like the other) sells for $2.39, then it
goes into the GDP cash register at $2.39.
Thus, inflation pushes up GDP -even
if output does not increase. To deal with the effects of inflation
(or deflation), it is necessary to express GDP in terms of REAL
(as opposed to nominal) dollars.
WHAT ARE FINAL GOODS AND SERVICES?
Final goods and services are those that are not intermediate.
WHAT ARE INTERMEDIATE GOODS AND SERVICES?
Intermediate goods are those used up entirely in the production
of final goods. Determining what is intermediate may be approached
in either of two ways.
RULE
- Anything purchased for resale - either directly or indirectly
- with or without further processing in the physical sense - is
classified as intermediate, and as such is excluded from
GDP.
RULE
- Anything charged to current cost (ie, anything
expensed as opposed to capitalized) is classified
as intermediate.
WHY EXCLUDE INTERMEDIATE GOODS?
To avoid double-counting. We want
to include the value of goods once and only once.
IN ONE YEAR
- this phrase tells us whether GDP
is a stock variable or a flow variable. Which is it?
STOCK VARIABLES VERSUS FLOW VARIABLES
STOCK
- an accumulated amount existing at a point in time.
FLOW - a per unit of time variable; a phenomenon (eg, spending,
income)
occurring at a particular rate over time.
WHAT DOES GDP NOT INCLUDE?
1. Intermediate Transactions
2. Most Nonmarket Transaction
3. Purely Financial Transactions
Capital gains, losses
Purchases, sales of securities
Secondhand sales
Transfers and Subsidies
4. Illegal Transactions
GDP-ADDING IT ALL TOGETHER
Conceptually, adding up the nation's output
is not particularly difficult. In general, the Department of
Commerce simply divides the economy into four spending sectors,
and then looks at expenditures arising from each sector. By far
the largest sector is the household sector. Expenditures
of this sector are called "Consumption" or Personal
Consumption Expenditures. Expenditures from the business sector
of the economy are called "Investment" or Gross Private
Domestic Investment. (At this juncture please recall that buying
stocks, bonds, gold, land, etc does not constitute investment
as far as the national income accountants are concerned. These
would represent purely financial transactions.) From the government
(at both federal and state and local levels) comes Government
Purchases of Goods and Services. (It should be kept in mind
that government transfer payments are not included in GDP, thus
much of the federal budget is excluded here. We are including
only actual purchases of goods and services the governments.)
Finally, from the foreign sector we have net exports of goods
and services, or exports minus imports.
Adding the expenditures arising from these four sectors yields Gross Domestic Product. The approach is called the expenditures approach or the product approach.