GDP: The Story Behind the Numbers (Part Two)

The third rule concerns inventories or extra goods whose production was paid for but do not end up being sold. Either one of two things happens in a scenario such as this one. If the goods are perishable and become spoiled or for any other reason must be disposed of, they do not factor into GDP. On the other hand, if the stock is inventoried for later sale, it is assumed that the vendor has bought its own goods and the sale value is input. Remember though, that when consumers do eventually buy these goods, they must be considered similarly to used goods for they have already been bought once. Next we must consider intermediate goods which though present in the final product, are added at distinct stages. Thus, the fourth rule states that a products value on the GDP is the market value of the item or the total value added by firms in the concerned economy. To explain, let’s look at a Panchero’s burrito. The total cost of the raw goods may have cost the restaurant about $3. These are then put together to create the delicious burrito we dish out $11 for. So what affect did my meal have on the United States GDP? The answer is $11 and not $14 because the original $3 is a part of the final retail value. We can also arrive at this by summing up the value added at each stage which is $3 at the farming/raw goods level and then $8 at the restaurant.

Finally and perhaps the most unsuspecting value comprises housing services and similar imputations. Imputed value is the estimated price of goods and services not sold in the market. For example, just as a tenant pays a monthly rent, a homeowner gives up a certain “rent” through the act of living in his/her residence (this is directly seen in the lower value at resale). Other such amounts include government services such as the police, fire department etc. and oddly enough, things like cooking, lawn mowing etc. Despite these efforts, imputing value is very difficult and uncertain; as a result, with the some exceptions (like the ones listed), this practice is avoided.

These are the broad concepts behind the calculation of a single yet comprehensive and telling figure. In the United States alone, the 2009 gross domestic product amounted to a mind-numbing $14.59. To put this in context, that’s the wealth of about 300 Bill Gates or to further simplify (sort of) about six billion of the leather couches from my previous blog entry. Needless to say, it’s a bit too much to comprehend, but through the gross domestic product we can arrive at a general picture of the staggering economic activity we are a part of.