Gross Domestic Product (GDP) Basics

Background / Basics

• The measures were created in the 1930’s.
• Until the 1990’s, Gross National Product was the federal measure of the economy.

 Key terms to know:
    “Gross” = Totals before adjustments (inflation’s effect)
    “National Product” = Production owned by US companies
    “Domestic Product” = Production in the US, even if foreign owned
 
GDP is officially measured in “quarters” of years:
    Quarter 1 = Jan/Feb/Mar
    Quarter 2 = Apr/May/June
    Quarter 3 = July/Aug/Sep
    Quarter 4 = Oct/Nov/Dec
 
Calculating GDP

“Expenditures” Approach
 C + Ig + G + Xn

• aggregates spending on production
• all spending on goods and services in the economy 

C = Personal Consumption in the economy

• (67% of the Economy !!!)
• The purchases of finished goods and services (but not houses)
• durable goods: anything expected to last three years or more
• nondurable goods: consumables like food, soap,

Ig = Gross Private Business Investment monies:

• Factory equipment maintenance,
• New factory equipment,
• Construction of housing,
• Unsold inventory of products built in a year, but not sold that year

G = Government Spending:

• Government purchases of products and services

Xn = Net Foreign Factor of Trade:  Exports minus Imports

• Exports = Dollars in, Imports = Dollars out
• (Post WWII, Xn has usually been a negative number: Trade Deficit)

Aggregate Income Approach
adds up all the income earned by resource suppliers in the economy. 

Items that DO NOT Count in GDP: 

• Used goods/Second-Hand goods
• Gifts or “Transfers” (Private or Public)
• Stock/Equity/Securities purchases (places like the NYSE, NASDAQ)
• Unreported business activities conducted in “cash” (unreported tips...)
• Illegal activities (underground markets)
• Financial transactions between banks and businesses
• “Intermediate goods” (no double counting) 
• “Non market” activities like volunteer and family work

Things Missed by GDP Calculation

• household production
• underground economy (stated above)
• Standard of Living 

• leisure - no way to count time off
• quality - a good is a good is a good, no accounting for better goods and services or more of them.
• Depreciation
• value of capital stock that is used up or becomes obsolete in producing GDP
• Externalities

Nominal vs. Real GDP
Dollar values change because of inflation / deflation. 
Makes year to year comparisons difficult.

• Nominal GDP is in current dollars, not adjusted for inflation. 
• Real GDP is adjusted for inflation in terms of a base year. 

(more on inflation later)