The GDP; you’ve undoubtedly heard of it before and if you haven’t you really should watch the news every once in a while. But what exactly is the gross domestic product?
Gross domestic product is the market value of all final goods and services produced within an economy in a given period of time; in other words, the GDP puts a single dollar value to the total output of goods and services with an economy over a set period of time. Though this may seem similar to the fiscal measures mentioned in earlier posts (such as C, M1, M2, M2 and M3), they differ in that GDP depicts flow while the latter show stock. To better understand the difference, think of a bathtub; flow values represent changing values from a set unit of time similar to the flow of water from the faucet while stock values are unchanged and measured at one point in time similar to the water sitting in the tub. Thus, the GDP illustrates the exchange of currency and consequently, is often used as a measure of economic activity.
The GDP can be measured in two main ways both of which reflect the same eventual value: as the sum of income and labor or as the sum of goods and expenditures. So calculating GDP as the total exchange of money for a certain time frame seems easy enough but how do we compute this value for a whole country for as long as an year. There are five main rules that allow us to figure out such a tremendous value. The first rule almost goes without saying; the price of individual goods affects their value in the GDP. This just means that 5 flash drives each worth $10 and 5 HD LCD flat-screens each worth $1000 translate to $5,050 GDP increase rather than a 10 electronic item increase. Next, the exchange of used goods cannot play a part in the GDP. This is because the GDP is meant to reflect production and economic activity. So when grandpa decides to sell his old used car to a desperate teenager, the trade doesn’t involve any form of manufacture or fiscal productivity and therefore is not input.
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