pcecon.com Class Notes

One way to measure all of the results of all of the production decisions of all of the people in the economy is with Gross Domestic Product, or GDP.
Gross Domestic Product is the
market value (measures the value of things legally traded in a market at the prices set by markets)
of final goods and services (counting only those items or services that are not going to be resold or used as part of another product)
produced domestically (counting everything made in the country, whether by citizens of other countries or this country)
in a year (things are only counted the year they are made; used items don't count)

Among the things that don't count in GDP are activities that are not traded in a market, such as household chores or projects. Illegal activities (drugs, prostitution, murder-for-hire, etc.), which are considered "black market" trades, also do not count. One reason for not counting some of these things is that putting a value on them is difficult.

Intermediate goods, that are going to later be part of something else that will be sold, do not count in GDP, since they will be counted when the products they are used to make are finished and sold to their final consumers. Any final service or good is counted, such as apartment use or car rentals (apartment buildings or cars sold to rental agencies do not count, since they are part of another service or product that will be traded).

Stuff that is produced in the country counts in GDP, no matter who produces it. Stuff produced by freedom-loving Americans who are living in some other, less freedom-loving country do not count in our U.S. GDP, but will count in that other, less freedom-loving country's GDP. However, another measure of production, the Gross National Product, will measure the output of a country's citizens , no matter where they produce it. So if this part of GDP sounds unfair, you could always resort to GNP (but almost no country cares about GNP anymore).

The GDP only cares about stuff the year it is produced. If it is produced in one year but sold in some later year, it effectively counts in the year that it is made, not the year that it is sold. It's a bit more complex, but that's the simple version. Old stuff doesn't count, no matter how nice it is. However, if you sell your old N-sync CDs on eBay, the fee eBay collects as a middleman will count in GDP, even though the CDs won't. That's assuming you can find a sucker, er, music lover. Also, if you pay a repair shop to fix your ten-year old car, the repair will count in the year it is performed.

Other things that do not count include transfers, which sound like the things you use on a long bus ride, but which actually are gifts or payments that do not involve the purchase of a good. The money you pay in taxes, the price of a lottery ticket, or the money your parents give you for your birthday would be transfers. They don't count in GDP because they don't involve production in themselves. However, if the government buys something produced this year with your tax payment, that purchase will count. If the lottery agency pays someone to produce tickets, that will count. When you spend the gift money on a nice restaurant meal, that will count.
Copyright 2006-7 by Ray Bromley. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.

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