Gross Domestic ProductThis is a featured page

Aggregate output:
  • The total market value of all final goods and services produced in a given year (does not include intermediate goods), also labeled as gross domestic product (GDP), which includes all goods and services produced by either citizen-supplied or foreign-supplied resources employed within the country.

A monetary measure:
  • GDP is a monetary measure used to compare the relative values of goods and services produced in different years.
  • GDP includes all goods and services produced by either citizen-supplied or foreign-supplied resources employed within the country.
  • ex) US GDP includes the market value of Fords produced by American-owned factory in Michigan and the market value of Hondas produced by Japanese-owned factory in Ohio.
  • If 4 computers and 2 TVs were produced in 2004, and 2 computers and 4 TVs were produced in 2005, which year had the greater output? By putting a price to the items, we can calculate GDP and see which item is worth more to society

Avoiding multiple counting:
  • Intermediate goods- goods and services purchased for resale or further processing or manufacturing.
    • Ex: the purchase and use of chocolate chips in the production of chocolate chip cookies. Chocolate chips are the intermediate good.
  • Final goods- goods and services purchased for final use by the consumer, not for resale or for further processing or manufacturing.
    • Ex: A chocolate chip cookie, which is the final product of intermediate goods.
  • GDP only includes the market value of final goods, not intermediate goods because the value of final goods already includes the value of all intermediate goods used in producing them. (Including the value of intermediate goods would amount to multiple counting,and that would distort the value of GDP)
  • Avoid multiple counting by measuring and adding only the value added - market value of a firm's output excluding the value of the inputs the firm has bought from others.
    • Ex: If a chocolate chip cookie manufacturer paid a chocolate manufacturer $50 for chocolate, and the total price for a pack of chocolate chip cookies is $100, the value added ($100 - $50) is $50.
  • As an example: The finished chocolate chip cookie is the good counted in GDP. The chocolate chips used to make the cookies, which are intermediate goods, have already been valued into the final product.

GDP excludes non-production transactions (if included, GDP would overstate the year's output) such as:
  • Financial transactions:
    • Public Transfer Payments: Social security payments, welfare payments, and veterans' payments that the government makes directly to households. Recipients contribute nothing to current production.
    • Private Transfer Payments: Money that parents give children, cash gifts etc. They produce no output, but simply transfer funds from one private individual to another.
    • Stock Market Transactions: The buying and selling of bonds does not add to current production.
    • BUT, payments for the services of a security broker are included in GDP, as these services contribute to current output.
    • Reason : stock and bonds are not tangible but GDP only includes the output that are tangible. Stock and bonds are just exchange or transfer on assets from one individual to another.
  • the monetary transaction was already counted in the GDP of the year the item was produced
    • Ex. Selling your 1965 Ford Mustang to a friend (this transaction doesn't generate any current production, and is therefore excluded when calculating GDP) and yard sales.
  • Secondhand sales- EXCLUDED from the GDP because secondhand sales don't contribute anything to the current production.
  • Black market sales- EXCLUDED from GDP
    • Excluded because they also do not contribute to the current production. A "black market" includes any sale made by a business who does not pay taxes to the government. Examples include fake DVDs in China.
    • also known as "underground" sales, the money involved in the transaction isn't reported to the government



jlau21
jlau21 		Latest page update: made by jlau21 , Feb 17 2008, 3:21 AM EST (about this update About This Update jlau21 Edited by jlau21

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