Measuring Total Output: Gross Domestic Product

Constructing measures that capture the overall behavior of the national economy involves what?

Aggregation

What is aggregation?

The combination of many different things into a single economic variable

What do well constructed aggregates help us see?

The big picture

What are the cost of using aggregates?

They obscure important details

What is the definition of GDP?

The market value of all final goods and services produced within a country during a specified period of time

How do we combine the different types of things a country produces?

By using their dollar value to add them up

If an economy produces 2 goods, A and B, and A sells for $5 each and B sells for $10, if the economy produces 100 of A and 25 B what is the GDP?

(100×5)+(25×10) = 750

Why do higher priced goods contribute more toward GDP?

Because of the use of market prices

What do market prices reflect?

The value that the marginal consumer places on the good

What are goods that are not used up in the production of a final good?

Intermediate goods

Why do we exclude intermediate goods from GDP?

To ensure GDP is not affected by the extent of vertical integration in the economy

Why is avoiding vertical integration into GDP important?

To avoid the possibility of double counting the value of some goods

In the case the final goods are either intermediate or final, what do we only count?

The portion of production sold to final users

If Sylvia raises 200$ worth of tomatoes and sells $100 worth uses $100 worth to made sauce and sells the sauce for $200 what is her GDP contribution?

$300, the $100 worth of tomatoes she sells to consumers, and $200 worth of tomato sauce

What are capital goods?

Long lived goods that are produced and used to produce other goods

When are capital goods included in GDP?

The year they are produced

Why do we count capital goods into GDP?

If we didnt, a country that invested in its future by building capital would appear to have a lower GDP

What does the word domestic in Gross Domestic Product indicate?

We only count goods produced within the borders of the country we are discussing

True or False, U.S. GDP includes the value of all automobiles produced in the U.S. whether made by an American manufacturer or a foreign owned one

True

What two time spans do economists conventionally consider?

Annual or quarterly

What is quarterly?

3 month periods

If a 20 year old house is sold this year for 150,000 is this ammount included into GDP?

No, the house was not produced this year

If the real estate agent who comissioned the 20 year old houses sale recieved a 6% comission would this fee be included into GDP?

Yes, the services were provided this year

When was the conceptual basis for measurement of GDP developed?

The 1930s

Who made the earliest attempt to measure national output?

Sir William Petty

When did Sir William Petty attempt to measure national economic output?

Mid 1600s

Why did Sir William Petty attempt to measure national economic output?

As part of the British governments effort to assess the ability of the Irish to pay taxes to the crown

Who made a comission for the development of a system to measure national output?

The U.S. Department of Commerce

Who did the U.S. Department of Commerce comission to develop the national output system?

Simon Kuznets

Why did the U.S. Department of Commerce comission Simon Kuznets to develop a system for measuring national output?

Because the lack of comprehensive data on national economic activity was hampering efforts to respond to the Great Depression in 1932

Who did Kuznets present his system to?

The U.S. Senate

When did Kuznets present his system?

1934

What provided an impetus for perfecting techniques of measuring output and establishing necessary data collection tools?

The U.S. entry into WW2

When did Kuznets win the Nobel Prize in Economic Science?

1971

What is the first limitation of GDP?

It is not always easy to determine what constitutes final goods and services

Are expenditures on national defense included in GDP?

Yes

What did Kuznets point out about expenditures on National Defense being included as apart of GDP?

It might equally be viewed as an intermediate good?

Why does Kuznets say that National defense might equally be viewed as an intermediate good?

It allows the citizens of a country to enjoy other final goods and services

What is a second limitation of GDP?

Its exclusion of goods that are not bought and sold in markets

Goods and services not bought or sold in markets are referred to as what?

non market production

What is an example of non market production?

Unpaid housework

Over the last 60 years as women have enterd the paid labor force, what has happened to GDP?

It has increased?

Why has GDP increased as a result of more women entering the paid labor force?

The amount of commercially provided childcare and housecleaning has increased

Some of the increase in childcare and housecleaning rather than an increase in total production, reflects an shift in what?

Simply a shift from non market to market activity

What occurs in the underground economy?

People provide other with goods or services without reporting the transaction to the government

What are examples of the underground economy?

Mowing a neighbors lawn or fixing a car for cash

What exists in the underground economy?

The black market

What is the third limitation of GDP?

It ignores activities that increase GDP but do not make us better off, and production that depletes a countries stock of natural resources or pollute the environment

What are examples of activities that increace GDP but do not make us better off?

Natural disasters and crime