Picture the economy as a giant supermarket, with billions of goods and services inside. At the checkout line, you watch as the cashier rings up the price for each
Picture the economy as a giant supermarket, with billions of goods and services inside. At the checkout line, you watch as the cashier rings up the price for each finished good or service sold. What have you just observed?
The cashier is computing a very important number: gross domestic product, or GDP.
GDP is the market value of all finished goods and services, produced within a country in a year.
But, what does "market value" mean? And what defines a "finished good"?
These, and more questions, percolate inside your head. Meanwhile, the cashier starts ringing up the total, and you’re left confused. An array of things pass by you — A bottle of wine. A carton of eggs. A cake from the local bakers. A tractor, of all things. A bunch of ballpens. A bag of flour.
In this video, join us as we show you how to make sense of this important economic indicator. You’ll learn how GDP is computed, and you’ll get answers to some pretty interesting questions along the way.
Questions like, “Why are the eggs in my homemade omelet part of the GDP, but the eggs my baker uses are not? Why does my bottle of French wine contribute to France’s GDP, even if I bought it in the United States?”
Most importantly, you’ll also learn why polar bears aren’t part of the GDP computation, even if they’re incredibly cute.
So, buckle in for a bit—in the following videos we’ll dive into specifics on GDP.
Contributed Content (0)
Ask a Question
Does GDP include the value of every good that´s been produced even thought it hasn´t been sold? Or does it only refer to goods that have been produced AND purchased by someone?
GDP values market transactions. However, if you produce an item late in the year (say December 31st), it's clear that you might not sell it in that calendar year. Still, that item has value and GDP is really a measure of production capability. What I've seen is that firms can reasonably "sell the item to itself" and count it as inventory. Inventory is a part of the the firm's investment (I). Of course some of the finer details of timing is more of an accounting issue.
Okay... so I like guitars... I know of one guitar company that has a build process that *begins* in Indonesia but it the guitar is *finished* in the United States.... I'm guessing that when this instrument is sold it counts towards the United States GDP as the export of the instrument from Indonesia was not a finished product.
Also while I'm at it, how does military spending (or governmental spending in general) affect the GDP? While I'm aware that the U.S. Military, to take one example, contracts with private firms for the production of their equipment (Raytheon, et al) does the fact that this is government spending impact the total that is used in the calculation of GDP? I'm guessing it doesn't... figured I'd ask.
While I'm on the topic... I have been thinking about the "illegal economy" in the United States and its affect on the value of the dollar - or the amount of dollars in circulation, which I'm not really sure is measured, but I'll ask anyway. Let's take the illegal drug trade - or really any 'vice' good or service - if money is used for these 'products/services' what is the overall impact on the economy? I realize this is far afield from the video I just watched but seeing as how the numbers I've seen on the 'vice industry' here in the States are staggering I began wondering about the impact it has on the economy.
I appreciate your response
How is it that some goods that are used to make other goods are still considered a finished good, when the eggs used in a cake are not considered finished goods?
Really enjoying the courses so far. Is the macro course still under construction? Modules 7 through 12 have no content. Cheers.