Measuring Output- GDP

1. Measuring Output- GDP Economic Performance

2. GDP • Gross Domestic Product (GDP)- dollar amount of all final goods & services produced within a country’s borders in a yr • It’s the most important measure of the economy’s economic performance • When GDP is down, so is the rest of the economy

3. GDP is a measure of all national output • This means that, if a Japanese car is produced in Indiana, it counts towards US GDP • Even if the investor lives outside the US • Think about China & India’s GDP

4. Measuring GDP= multiply all the final goods & services produced in a 12 month period by their prices • Then add them up to get the total dollar value of production • GDP is calculated every 3 months

5. Exclusions • Not every item is included in GDP • The Dept of Commerce analyzes production & has to make choices over what to include • This leads to underground economies and black markets

6. Intermediate products- products used to make other products already counted in GDP • Ex. If you buy replacement tires, those tires are counted in GDP • BUT!!! If you buy a new car, the tires aren’t counted separately • Their value is built into the price of the car

7. Intermediate products are eliminated from GDP so they aren’t counted twice • This keeps GDP from looking larger than it actually is

8. Another decision involves the exclusion of secondhand sales- the sales of used goods • When products, already produced, are transferred from one person/group to another, no new production is created • Used cars, houses, clothes, etc…don’t count towards GDP… • Only the original sale… so how do they help the economy?

9. Nonmarket transactions- transactions that don’t take place in the market- are excluded • They are too difficult to measure • GDP doesn’t count services like you mowing your lawn or picking up sticks • They only count when done for pay outside the home

10. Many other activities take place in the market, but are excluded because they’re illegal & not reported • Unreported legal & illegal activities: gambling, prostitution, drugs, counterfeiting, smuggling are part of the “underground economy” • GDP could increase nearly 20% if underground economy transactions were included • Why don’t some want it counted?

11. Limitations • Increases in GDP indicate more people have jobs & earn income • However, GDP tells nothing about the composition of output

12. So if GDP increases by $10 billion, we know production is growing • But that could be production of military equipment, instead of schools, libraries, etc(North Korea) • GDPdoesn’t show the impact of production on quality of life • 10 million shantyhouses?

13. Despite the limitations, GDP is still our best measure of economic health • It’s a measure of voluntary transactions in the market • Voluntary transactions are supposed to indicate that both sides feel they are better off • So larger GDP should indicate people being better off