Gdp Theory with Definition and Examples
6/20/13
Out.OM1a
What's in and what's not in GDP?
Definition: GDP is defined as: the market value of currently produced, final goods and services produced annually within a country's borders.
It turns out that nearly each term in this definition is there for a reason and that if we look briefly at each of the terms we will have a better sense of what GDP is - and what it is not. First, however, let's fast forward and acknowledge that GDP is NOT a measure of economic well-being - a point first made by Kuznets who developed the national income accounts, and more recently presented by Cobb, Halstead, and Rowe in their 1995 Atlantic Monthly article: "If GDP is UP, Why is America Down?" Now let's look at the individual terms and see where this divergence comes into play. GDP is the market value ... Market price is the common denominator for the tons of steel, bushels of apples, or gallons of wine produced in an economy. GDP is simply the weighted sum of output from all sectors of the economy, where output is valued at market prices. The rationale for this approach is that the market prices reflect what individuals pay for these goods and services, and thus prices must reflect how people value them. If you pay $16 for a CD, then it must be worth $16 to you, and thus the market value can be viewed as a measure of value created. If 10 CDs are produced and sold at a price of $16, then $160 worth of value has been created. Because of the nature of the GDP calculations, natural disaster can provide a boost to the economy in much the same way as a war. An example would be the boost to GDP given by the recovery efforts following the destruction of hurricane Andrew. It also means the enormous sums spent on security tend to push GDP higher. As Cobb (1995) points out, the bombing in Oklahoma City gave the economy a little boost as it generated demand for security systems. William Bennet, Secretary of Education under Reagan, produced a study of social decline called "The
Out.OM1a
What's in and what's not in GDP?
Definition: GDP is defined as: the market value of currently produced, final goods and services produced annually within a country's borders.
It turns out that nearly each term in this definition is there for a reason and that if we look briefly at each of the terms we will have a better sense of what GDP is - and what it is not. First, however, let's fast forward and acknowledge that GDP is NOT a measure of economic well-being - a point first made by Kuznets who developed the national income accounts, and more recently presented by Cobb, Halstead, and Rowe in their 1995 Atlantic Monthly article: "If GDP is UP, Why is America Down?" Now let's look at the individual terms and see where this divergence comes into play. GDP is the market value ... Market price is the common denominator for the tons of steel, bushels of apples, or gallons of wine produced in an economy. GDP is simply the weighted sum of output from all sectors of the economy, where output is valued at market prices. The rationale for this approach is that the market prices reflect what individuals pay for these goods and services, and thus prices must reflect how people value them. If you pay $16 for a CD, then it must be worth $16 to you, and thus the market value can be viewed as a measure of value created. If 10 CDs are produced and sold at a price of $16, then $160 worth of value has been created. Because of the nature of the GDP calculations, natural disaster can provide a boost to the economy in much the same way as a war. An example would be the boost to GDP given by the recovery efforts following the destruction of hurricane Andrew. It also means the enormous sums spent on security tend to push GDP higher. As Cobb (1995) points out, the bombing in Oklahoma City gave the economy a little boost as it generated demand for security systems. William Bennet, Secretary of Education under Reagan, produced a study of social decline called "The