Chapter 1 MEASURING A NATION'S INCOME

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3. The Measurement of Gross Domestic Product

a. Definition of gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time.

b. “GDP Is the Market Value . . .”

1) To add together different items, market values are used.

2) Market values are calculated by using market prices.

c. “. . . Of All . . .”

1) GDP includes all items produced and sold legally in the economy.

2) GDP also includes the market value of housing services provided by the economy's stock of housing.

a) If housing is rented, the value of the rent is used to measure the value of the housing services.

b) For housing that is owned (or mortgaged), the government estimates the rental value and uses this figure to value the housing services.

3) GDP does not include illegal goods or services or items that are not sold in markets.

a) When you hire someone to mow your lawn, that production is included in GDP.

b) If you mow your own lawn, that production is not included in GDP.

d. “. . . Final . . .”

1) Only the value of final goods is included in GDP. Intermediate goods are not included in GDP.

2) The value of intermediate goods is already included as part of the value of the final good.

3) Goods that are placed into inventory are considered to be “final” and included in GDP as a firm's inventory investment.

a) Goods that are sold out of inventory are counted as a decrease in inventory investment.

b) The goal is to count the production when the good is finished, which is not necessarily the same time that the product is sold.

e. “. . . Goods and Services . . .”

1) GDP includes both tangible goods and intangible services.

f. “. . . Produced . . .”

1) Only current production is counted.

2) Used goods that are sold do not count as part of GDP.

g. “. . . Within a Country . . .”

1) GDP measures the production that takes place within the geographical boundaries of a particular country.

2) If an American citizen works temporarily in the Canada, the value of his output is included in GDP for the Canada. If an American owns a factory in Haiti, the value of the production of that factory is not included in U.S. GDP.

h. “. . . in a Given Period of Time.”

1) The usual interval of time used to measure GDP is a quarter (three months).

2) When the government reports GDP, the data are generally reported on an annual basis.

3) In addition, data are generally adjusted for regular seasonal changes.