College Preparatory Program • Saudi Aramco
Gross Domestic Product
Macroeconomics Tips
What Is GDP (Gross Domestic Product)?
Definition:
GDP = The Market Value of all final goods and services produced in a year within a country.
Definition:
MARKET VALUE = the value of goods and services at whatever the market will pay,
or the market price.
Key points: Some things are not included in the GDP
 Illegal transactions
 Work done at home (such as a homemaker’s jobs: washing dishes, cooking, cleaning, cutting
the grass, picking up the children at school, shopping for food, etc.)
 Barter (a doctor exchanges medical advice for legal advice from a lawyer)
 Cash transactions that go unreported (pay a local school boy or girl to babysit your children,
cut the grass in the front yard of your home, help you trim the trees in the backyard, etc.)
Definition:
FINAL GOODS AND SERVICES = Goods and Services available to the end user or consumer.
Key points: The value of intermediate goods is not counted.
 The total value of the tires used in the production of a car (the final product)
is not added to the final price. Otherwise, this would lead to overstating
the value of the final product (double counting).
Challenge: Use the Internet to look up the VALUE ADDED METHOD of determining GDP.
Definition:
PRODUCED IN ONE YEAR = Exactly what it says.
Any goods and services produced in the previous year are
counted in that year’s GDP. This includes Inventory* left unsold.
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A house built last year is not counted in this year’s GDP.
However, the fees involved in selling that house this year are.
Moreover, a delivery van bought last year is not counted in this year’s GDP,
but the income earned by the company using this van is.
*Inventory: If 100 items of a product are produced in one year and only 80 are sold,
the remaining 20 are still included in GDP for the same year. They are NOT
carried over to the GDP of ensuing year.
Challenge: Use the Internet to look up the meaning of INVENTORY in macroeconomics.