- GDP is the Gross Domestic Product which refers to the total market value of all final goods and services produced within a given period by factors of production located within a country.
- If General Motors was to issue new shares of stock to finance the construction of a plant, , it would be counted towards the GDP since it would be a part of the firm’s net investment.
- If General Motors was to build a new plant, , it would be counted towards the GDP since the new plant would be an investment in capital of the private sector.
- If Company A successfully launches a hostile takeover of Company B, in which Company A purchases all the assets of Company B , it would be counted towards the GDP since there would be a change in business inventories which is part of private investment.
- If I were to buy a new copy of a textbook, it would be counted towards the GDP since a new textbook purchase would be a purchase of new goods for private consumption.
- If I was to buy a used copy of a textbook, , it would not be counted towards the GDP since a used textbook purchase would be a purchase of old goods for private consumption and GDP ignores all transactions in which money or goods change hands.
- If the government pays out social security benefits, , it would not be counted towards the GDP because transfers of funds aew not purchases of anything currently produced. In addition the payments are not made in exchange for goods or services.
- If I spent the weekend cleaning my apartment, it would not be counted towards the GDP since domestic activities carried out by ones self are not part of the ten market categories within the United States.
- If a drug dealer sells $5000 worth of illegal drugs, , it would not be counted towards the GDP since this would be part of the underground economy, wherein the drug dealer would not be paying income tax on his “income”.
- Gross Domestic Product or GDP can be calculated using two approaches: expenditure approach and income approach. Expenditure approach calculates the total amount spent on all final goods and services during a given period. Income approach calculates the total income in the form of wages, rents, interests and profits, that are received by all factors of production in producing final goods and services.
To calculate GDP using the Expenditure approach, we must look at the four categories of expenditure:
- Personal Consumption Expenditure or Private Consumption or Household Consumption (C). It is the expenditure by consumers on goods and services
- Gross Private Domestic Investment or Private Investment (I). It is the total investment in capital of the private sector ( non-government sector).
- Government Consumption and Gross Investment (G). It is the expenditure by Federal, State and Local governments for final goods and services.
- Net Exports (EX-IM) are the difference between exports and imports.
GDP= C+I+G+ (EX-IM)
GDP can also be calculated using the Income Approach by looking at who receives the income as opposed to who purchased it. It consists of 4 components: National Income (NI), Depreciation, Indirect Taxes minus subsidies and Net factor payments to the rest of the world.
– Gross National Product (GNP) is the total market value of all final goods and services produced within a given period by factors of production, owned by a country’s citizens, regardless of where the output is produced.
– Net national Product (NNP) is the Gross National product minus any depreciation. A nation’s total product minus what is required to maintain the value of its capital stock.
-National Income (NI) is the total income earned by the factors of production owned by a country’s citizen, including compensation of employees, Proprietors’ income, Corporate Profits, Net Interest and Rental Income.
-Personal Income (PI) is the total income before the payment of income taxes i.e. the amount that households can either spend or save.
-Disposable Personal Income (DPI) is the personal income after income taxes that can either be spent or saved by the households.
Limitations of GDP in measuring the performance of an economy:
-Underground Economy is the part of the economy in which transactions take place in which income is generated but not reported to avoid paying income taxes, and can therefore not be counted in GDP.
– Social Welfare is not reported in GDP. This means that regardless of crime rates decreasing, or voluntary leisure time increasing, the GDP will not be able to reflect this since the increase in social welfare will not necessarily have an impact on an increase in GDP.
– Non-market and Domestic Activities are not counted. For instance cleaning up one’s house, growing vegetables for self-consumption, raising one’s own children cannot be counted towards the GDP even though the output amounts to real production. However, if one was to enlist the services of a maid, house cleaner, nanny etc., those services can be counted towards the GDP.
– Neutrality of the kinds of goods and services produced regardless of its value to society. Items or services cannot be specified and are looked at as a total contribution to GDP.
– GDP tells us nothing about how the income is distributed within a country.