What is GDP?
Gross Domestic Product (GDP)
The broadest measure of aggregate economic activity, as well as the best-known
and most often used, is the gross domestic product, or GOP. As in the example in
Section 2.1, a country's GOP may be measured by the product approach, the
expenditure approach, or the income approach. Although the three approaches
arrive at the same value for GOP, each views GOP differently. Using all three
approaches gives a more complete picture of an economy's structure than any
single approach could.
T h e P ro d u ct A p p r o a c h to M e a s u r i n g G O P
The product approach defines a nation's gross domestic product (GOP) as the
market value of final goods and services newly produced within a nation during a
fixed period of time. In working through the various parts of this definition, we
discuss some practical issues that arise in measuring GOP.
M a rk e t Va l u e . Goods and services are counted in GOP at their market
values that is, at the prices at which they are sold. The advantage of using
market values is that it allows adding the production of different goods and services.
Imagine, for example, that you want to measure the total output of an
economy that produces 7 cars and 100 pairs of shoes. Adding the number of cars
and the number of pairs of shoes to get a total output of 107 wouldn't make
much sense because cars and shoes aren't of equal economic value. But suppose
that each car sells for $10,000 and each pair of shoes sells for $60. Taking these
market-determined prices as measures of relative economic values, you can calculate
the value of cars produced as $70,000 (7 x $10,000) and the value of shoes
produced as $6000 (100 x $60). The total market value of production, or GOP, is
$70,000 + $6000 = $76,000. Using market values to measure production makes
sense because it takes into account differences in the relative economic importance
of different goods and services.
N e w l y P r o d u c e d G o o d s a n d Service .
As a measure of current economic
activity, GOP includes only goods or services that are newly produced within the
current period. GOP excludes purchases or sales of goods that were produced in
previous periods. Thus, although the market price paid for a newly constructed
house would be included in GOP, the price paid in the sale of a used house is not
counted in GOP. (The value of the used house would have been included in GOP
for the year it was built.) However, the value of the services of the real estate agent
involved in the sale of the used house is part of GOP, because those services are provided
in the current period.
Final Goods and Services.
Goods and services produced during a period of
time may be classified as either intermediate goods and services or final goods
and services. Intermediate goods and services are those used up in the production
of other goods and services in the same period that they themselves were produced. For
example, flour that is produced and then used to make bread in the same year is an
intermediate good. The trucking company that delivers the flour to the bakery
provides an intermediate service.
Final goods and services are those goods and services that are not intermediate.
Final goods and services are the end products of a process. For example,
bread produced by the bakery is a final good, and a shopper's bus ride home from
the bakery is a final service. Because the purpose of economic activity is the production
of final goods and services, with intermediate goods being but a step
along the way, only final goods and services are counted in CDP.
Sometimes the distinction between intermediate goods and final goods is
subtle. For example, is a new lathe sold to a furniture manufacturer an intermediate
good or a final good? Although the lathe is used to produce other goods, it
is not used up during the year. Hence it is not an intermediate good; it is a final
good. In particular, the lathe is an example of a type of final good called a capital
good. Other more general examples of capital goods include factories, office
buildings, equipment, and software. A capital good is a good that is itself produced
(which rules out natural resources such as land) and is used to produce
other goods; however, unlike an intermediate good, a capital good is not used up
in the same period that it is produced. The prepares of the national income
accounts decided to classify capital goods as final goods and thus to include their
production in CDP. Their reasoning was that the addition to productive capacity
from new capital goods represents economic activity.
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