Gross Domestic Product
• GDP – the dollar value of all final goods
and services produced within a country’s
borders in a given year
–Dollar value is the total of the selling
prices of all goods and services
–Final goods and services are all
products and services sold to
consumers
–Intermediate goods are goods and
services used in the production of the
final goods – not calculated in GDP
• Produced within a country’s borders
is especially important to remember.
–Cars made in Ohio by a Japanese
car company are calculated in the
GDP
–Cars made in Brazil by an American
automaker is not included in the
GDP
• Suppose your neighbor sold his
house this year. When the house
was built it was counted in that
year’s GDP so it would be inaccurate
to count it again. However, the fee
paid to the real estate agent would
be included because those were
services performed this year
• Your neighbor built a new home
to live in. The lumber, nails,
shingles, windows, etc. would not
be counted in the GDP because
these are all intermediate
goods…their value are included in
the final price of the house.
• Consumer goods include DURABLE
GOODS – goods that last for a long time,
such as refrigerators, cars, DVDs, etc.
• Consumer goods also include
NONDURABLE GOODS – good that only
last a short period, such as food, shoes,
light bulbs, etc.
• Why calculate GDP? Government
policymakers measure GDP to find
out how well the economy is
performing.
Limitations of GDP
• Calculating the GDP of the US is a
huge, complicated undertaking. It is
not perfect.
–Nonmarket activities
–Underground economy
Nonmarket Activities
• GDP does not measure goods and services
that people make or do themselves, such as
caring for children, mowing the lawn, cooking
dinner, washing the car, etc.
• GDP does rise however when we pay
someone else to do the above chores
• This means when nonmarket activities shift to
the market GDP is pushed up even though
production has not really increased
Underground Economy
• Black Market
– Drugs, weapons, stolen cars, etc.
– Under the table wages
– Unreported wages to babysitters
– All of these add nothing to the GDP even though
goods and services were produced