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What Does GDP Really Mean?

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  • What Does GDP Really Mean?

    Admit it! It's happened to you too. You know what I'm talking about- you're sitting there sipping your coffee while reading the Business section of the New York Times when you come across an article that goes on about our country's GDP.

    Sure- I know what GDP is; it stands for gross domestic product! And that means... ?

    Our economy's primary measure of performance is its annual output of goods and services; in other words, we're talking about our nation's GDP. If you take the aggregate output of what our nation produces and put a price tag on it, you get gross domestic product. So, in short, it's a number expressed in dollars as to how much product and service our economy produces.

    This number includes all goods and services produced by either citizen-supplied or foreign-supplied resources that are employed within the US. So that means if you have Honda (a Japanese company) based in Ohio selling cars, the total output expressed in a dollar value will fall under the United States' GDP.

    Here's a question: let's assume that an economy produces 2 books and 1 blanket one year, and 1 book and 2 blankets the next year. Which year was there greater GDP? In order to answer that, we need more information because gross domestic product is expressed in dollars! So in order to decide which combination would have produced a greater GDP, we would have to attach a price tag to each of the products considered. Understand that GDP is a monetary measure.

    One more quick point- to measure aggregate output accurately, all goods produced in a year must be counted only once! The problem is that most products go through several stages of production where various components are sold several times. GDP ONLY considers the market value of final goods, not all of the products sold on an intermediate level. So, if you produce a portion of a product and sell it to a manufacturing company, you're producing an intermediate product that won't be considered in GDP.

    Now- next time you open up the New York Times or The Economist, you'll understand exactly what GDP is and how it is calculated!

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