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Gross Domestic Product (GDP)

GROSS DOMESTIC PRODUCT (GDP)

Led by the auto industry, the United States economy grew rapidly in the 1920s, generating more jobs, more income, and more free time that the American consumer had in order to spend. As long as people were employed, paying for goods and services, there was really no need to measure how the economy was doing. However, in the 1930s, the American economy went bust and a frustrated Congress asked if there was any way to measure the depth of the Great Depression.

On January 4, 1934, economist Simon Kuznets (19011985), professor at the University of Pennsylvania, sent to the Senate a report entitled "National Income: 19291932," the first accounting of U.S. productivity, essentially the gross national product (GNP). More than 4,500 copies of this report were sold in just eight months. The basic concept that Kuznet had was to limit this accounting measurement to the marketplace, and thus to the amount that consumers paid for goods and services. Until 1992, the term GNP was used to refer to the total dollar value of all finished goods and services produced for consumption in society during a particular period of time (usually one year). In 1992 the Commerce Department began to compute gross domestic product (GDP) instead of GNP. The differences between the two are slight and involve how to count earning of assets owned by foreigners. GNP counts the earnings in the homeland of the owner of the asset, while GDP counts the earnings of a manufacturer in the country in which the assets exists. For the United States, there is virtually no difference between the two measures.

There are three basic components that determine the U.S. GDP:

  1. Consumption, the amount that consumers pay for goods (durable and nondurable).
  2. Investment, the amount of money spent on new production facilities, that is, plants and facilities.
  3. Services, the amount that consumers pay for the services they use.

Several things that were not included in GNP but were subsequently included in the GDP are:

  • Work that is provided in an economy by nonmarket transactions such as homemakers and military personnel. These factors were too difficult for Kuznets and his team to measure.
  • Illegal activities such as gambling and drug trafficing. These factors are also difficult to estimate but Kuznets excluded them from GNP because he deemed them a "disservice" to the economy.
  • Goods and services that are bartered. These were excluded because they cannot be measured.
  • Sale of intermediate goods (raw materials).
  • Sale of used goods (used cars, furniture, etc.).
  • Purely financial transactions such as sale of stocks and bonds.
  • Imports (goods made outside the United States).

The GDP is the ultimate benchmark that measures the expansion and contraction of the U.S. multitrillion dollar national economy. It covers everything that is produced and sold in the marketplace. Bankers, investment brokers, and government officials use the GDP to determine such things as interest rates, investment opportunities, and tax rates. The GDP is not the only measure of output, however, as economists use the GDP because it is the most comprehensive of output measures. This measure is important because it helps societies understand both inflation and employment.

In the flow of payments in the economy, where does one measure? Consider, for example, an automobile. The mining operator receives income from the sale of iron ore, the mill owner receives income from the sale of finished steel, and the automobile manufacturer receives income from the sale of the finished car. In order to avoid the inaccuracy of counting the same money three times, Kuznets decided to use only final sales. Thus the amount paid to the dealer for the car is the only amount used in calculating GDP. The labor cost of the workers at all three locations is added to GDP. In essence, the price of the automobile includes the cost of the materials purchased from suppliers. The value added to manufacture the automobile can be found by deducting the cost of one product from the total cost of the automobile.

The more goods and services a country produces, the healthier that country's economy becomes. There is a major flaw in measuring economic success, however, in that when GDP (production) increases, negative externalities

Product and prices
Year 1 Year 2
Goods Output Prices Output Prices
Balls 10 balls $50 per ball 10 balls $55 per ball
Bats 10 bats $25 per bat 12 bats $25 per bat
Gloves 10 gloves $25 per glove 9 gloves $30 per glove

(air and water pollution) also increase. The environment becomes degraded and negatively affects the quality of life. The GDP measures goods and services traded, but the negative externalities are not included in this counting. However, these negative externalities increase the GDP. For example, when the automobile industry wants to produce more cars, the smoke that is emitted from the smokestacks includes carcinogens that may make people in the area sick. A person who gets sick from the emitted smoke may go to the doctor. The doctor may prescribe medication. The cost of the visit to the doctor and the cost of the medication are added to the total value of the GDP.

Table 1 contains output and price statistics for a simple economy that produces only three goods. In the first year, the value of output, or GDP, is $1,000; in the second year, the GDP is $1,120. These numbers are obtained by multiplying quantities by prices and then summing the resulting values. They give us current dollar or nominal GDP, that is, the value of output measured in prices that existed when the output was produced.

The GDP has risen 12 percent from the first year to the second, but this increase is only partially due to additional output ($1,120 $1,000 = $120). Part of the increase is due to changes in prices. To get a measure that contains only the increase in output, we can multiply the outputs of the second year by the prices of the first year. When we add up these values, they total $1,025. This number implies that if only the quantities of output had changed and not the prices, GDP would have increased only from $1,000 to $1,025, a rise of only 2.5 percent. This $1,025 is real GDP.

see also Macroeconomics/Microeconomics

bibliography

Eggert, James (1997). What is Economics? (4th ed.). Mountain View, CA: Mayfield Publishing Company.

Mansfield, Edwin, and Behravesh, Nariman (2005). Economics U$A (7th ed.). New York: W.W. Norton & Co.

Mings, Turley, and Marlin, Matthew (2000). Study of Economics: Principles, Concepts, & Applications (6th ed.). Guilford, CT: Dushkin/McGraw-Hill.

Wilson, J. Holton, and Clark, J. R. (1996). Economics. Cincinnati, OH: South Western Educational Pub.

Gregory P. Valentine

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Gross Domestic Product

Gross Domestic Product

BIBLIOGRAPHY

As a measure of the aggregate level of economic activity, gross domestic product (GDP) is the main indicator used to monitor the state of an economy. GDP growth, commonly referred to as economic growth, is thus of great interest to policymakers for the conduct of fiscal and monetary policy. It is also widely used to measure productivity of an economy.

GDP is defined as the value-added of all goods and services produced in a given period of time within a country. The measurement of GDP can be approached from three angles: value added by industry, final expenditures, and factor incomes.

  • Value added created by industry (output less inputs purchased from other producers);
  • Expenditures by consumers, businesses on investment goods, government on goods and services, and foreigners for exports (minus expenditures by domestic residents on imports); and
  • Incomes generated in production, operating surplus generated by business and compensation of employees.

GDP is usually expressed in terms of current prices in national currency units, or in real terms (real GDP) after removing the effects of price change to reflect the volume of production in the economy. For international comparisons, GDP is also expressed in a common currency such as U.S. dollars using purchasing power parity exchange rates.

Up to the 1980s, the term gross national product (GNP) was more commonly used than GDP. The former, more correctly called gross national income (GNI), includes incomes of residents of a country earned abroad and excludes incomes from domestic production sent abroad. In contrast, GDP includes only domestically produced incomes. GNI in combination with GDP are often expressed in per capita terms and used as measures of living standards of the nation.

National income accounting (the methodologies to measure GNI and GDP) originated in the 1930s and 1940s with the work of Simon Kuznets in the United States and Richard Stone in the United Kingdom. A detailed history of national accounting is found in Andre Vanolis work A History of National Accounting (2005). Since the 1950s, the United Nations, working with other international organizations such as the International Monetary Fund, World Bank, and Organization for Economic Cooperation and Development, has coordinated the development of international standards for the national accounts. The current international standard was last issued in 1993. These standards evolve over time with the world economies, and a new edition of the standard will be released in 2008. The International Association for Research in Income and Wealth was founded in 1947 for the advancement of knowledge related to national accounting. The publications of this Association, including the journal Review of Income and Wealth, document the evolution of the field.

GDP is not a measure of economic welfare. It does not incorporate into its official estimates environmental degradation and resources depletion, nor the value of leisure. Neither does it take into account the influence on income inequality and economic insecurity on well-being.

BIBLIOGRAPHY

United Nations. 1993. System of National Accounts. http://unstats.un.org/unsd/sna1993/toctop.asp.

Vanoli, Andre. 2005. A History of National Accounting. Amsterdam: IOS Press.

Andrew Sharpe

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Gross Domestic Product

GROSS DOMESTIC PRODUCT


Gross Domestic Product, or GDP, represents the total output of goods and services produced by a nation. In the United States for example, GDP includes all the corn and wheat grown by farmers, all the movies filmed in Hollywood, all the automobiles built in Detroit, all the meals served in restaurants, all the money spent on school books; in other words, every item produced for sale in the United States is represented by the GDP. Obviously millions of products and services go into the GDP of a modern industrial economy. Government economists keep track of output and release a measure of the GDP four times a year. These figures try to capture the amount that the economy is growing or shrinking. For example the government may report that the economy grew three percent in a given year. When the GDP figure is rising, the nation is in a positive economic upswing. In such times, more workers are being hired, and paychecks are getting bigger. But when the GDP begins to shrink, it means the nation is entering a recession. More people lose their jobs, and families have to tighten their belts. In general GDP growth in the range of three to five percent a year in the United States is considered healthy; growth of one or two percent a year is considered slow; and any decline in GDP is considered cause for alarm.


See also: Gross National Product

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gross domestic product

gross domestic product (GDP) Total amount of goods and services produced by a country annually. It does not include income from investments or overseas possessions. GDP gives an indication of the strength of national industry. See also gross national product (GNP)

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"gross domestic product." World Encyclopedia. . Retrieved August 16, 2017 from Encyclopedia.com: http://www.encyclopedia.com/environment/encyclopedias-almanacs-transcripts-and-maps/gross-domestic-product

gross domestic product

gross do·mes·tic prod·uct (abbr.: GDP) • n. the total value of goods produced and services provided in a country during one year. Compare with gross national product.

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"gross domestic product." The Oxford Pocket Dictionary of Current English. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

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GDP

GDP • abbr. gross domestic product.

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gross domestic product

gross domestic product: see gross national product.

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"gross domestic product." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

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GDP

GDP (guanosine diphosphate) See GUANOSINE PHOSPHATE.

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GDP

GDP (guanosine diphosphate) See GUANOSINE PHOSPHATE.

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GDP

GDP (guanosine diphosphate): see guanine.

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GDP

GDP Abbreviation of gross domestic product

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GDP

GDP (or gdp) gross domestic product
• Biochem. guanosine diphosphate

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