GDP and The Measurement of Progress
What is GDP
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a
country in a year.
GDP per capita GDP divided by population
Gross National Product is the market value of all final goods and services produced by a country’s
permanent residents, wherever they may be located, in a year.
Breaking it down
1. Market value – goods are measured in terms of their market prices. A car ($30,000) adds more than a
pen ($1).
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2. Final goods – only final goods and services are counted. These goods are sold to final users and then
consumed or held in personal inventories. Intermediate goods are goods that are bundled or processed
with other goods and services. These are not counted in GDP until they are sold in the fully assembled
good or service.
A microprocessor sold by Intel to HP for inclusion in a desktop computer doesn’t count. It gets counted
in the price of the computer when it is sold to a person or business.
A John Deere tractor sold that is used to harvest soy beans does count though. The tractor is a finished
good and not really considered part of a soybean. Machinery and equipment sold to businesses is
considered part of final output and is included in GDP.
3. Goods and services – haircuts and carwashes (services) count just like new computers or new
textbooks.
4. Produced – new stuff or services count, but not used goods that have already been produced in an
earlier period.
5. Within a country – for US GDP the good has to be produced within the geographic area of the U.S.
Buying a Ford produced in Mexico does not count (at least the part produced in Mexico). Buying a
Toyota produced in Ohio does count (at least the part that was produced in the USA).
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6. in a given period of time – that usually means within a year or quarter.
• Tell us how much is produced in a year, not the sum total of our wealth • Wealth would be the value
of a nation’s entire stock of assets, which accumulate and depreciate over time. • Compiled quarterly by
the Bureau of Economic Analysis (BEA) which is part of the U.S. Department of Commerce in
Washington, D.C.
Growth rates
This tells us how rapidly output is growing or falling over time. GDPt −GDPt−1 GDPt−1 ×100 = GDP
growth rate for year t Example: GDP for the 3rd quarter of 2013 was $15,681.0 billion. For the 2nd
quarter it was $15,583.9. Second quarter growth is estimated to be: 15681.0−15583.9 15583.9 ×100 =
0.62 per quarter To make this comparable to yearly growth, multiply by 4. 4 quarters × 0.62/quarter =
2.49 3
This is often approximated using a slightly different calculation that works well when growth rates are
relatively low. Continuously Compounded Annual Rate of Change
[ln(GDPt)−ln(GDPt−1)]×100)×number of obs per yr = The function ln is the natural logarithm. In terms of
our example that would be
[ln($15,681.0)−ln($15,583.9)]×100×4 = 2.485 This is probably the most widely used way of calculating
growth rates based on time series data, though there are others. Just be aware that growth rates that
you calculate may not match exactly those computed by others since there are small variations in the
formulae.
Nominal vs Real GDP
Economists usually are more interested in increases in production than increases in prices because only
increases in production are true increases in the standard of living. To measure increases in production,
we look at growth rates of real GDP.
