History of the GDP and Introduction

History

  • in 1930s, the nation was in the midst of the Great Depression
    • policy makers had no comprehensive picture of what was happening to the economy
  • 1929-1937: “national income” approach using Internal Revenue Service (IRS) tax data
  • 1940s: the US economy moved from peacetime to wartime production
    • GDP estimates helped in assessing the economy’s overall productive capacity and the impact of moving from consumer spending on goods and services to federal government spending on tanks, materials, and other was expedentures
  • lacking other alternatives, the decision was made to estimate “final sales”, which would exclude the value of intermediate products and would equal incomes earned by the factors of production
  • gross domestic production (GDP): the market value of all finished goods and services produced within a country in a year

Introduction

  • an economy’s total output includes millions of different goods and services
  • some goods are more valuable than others, so we can’t just add quantities
  • GDP uses market values to determine how much each good or service is worth and then sums the total
  • only finished goods and services are included in GDP
  • finished goods: sold to final users and then consumed or held in personal inventories
    • considered to have significant value as collateral for a lender because they can be sold off with no delay for finishing any work
  • intermediate goods: sold to firms and then bundled or processed with other goods or service for sale at a later stage
    • intermediate goods can also be finished goods since it is consumed directly by consumers and used by producers to manufacture other products
    • ex: salt

Final vs Intermediate Goods

  • final goods include:
    • goods purchased for final consumption
    • ex: kale from Walmart
    • goods purchased by firms for capital formation or investment
    • ex: machinery purchased by a farm to grow kale
    • final goods are neither resold or used for any further transformation in the process of production
  • intermediate goods include:
    • goods purchased for resale
    • ex: kale purchased by a Walmart
    • goods used for further production
    • ex: kale used for making kale juice