Page 381 - Encyclopedia of Business and Finance

eobf_G 7/5/06 3:03 PM Page 358

Gross Domestic Product (GDP)

Kotler, Philip, and Armstrong, Gary (2006). Principles of market- 3. Services, the amount that consumers pay for the
ing (11th ed.). Upper Saddle River, NJ: Pearson Prentice- services they use.
Hall.
Ottman, Jacquelyn A. (1998). Green marketing (2nd ed.). Lin- Several things that were not included in GNP but
colnwood, IL: NCT Business Books. were subsequently included in the GDP are:
Pride, William M., and Ferrell, O. C. (2006). Marketing concepts • Work that is provided in an economy by nonmarket
and strategies. Boston: Houghton Mifflin.
transactions such as homemakers and military per-
sonnel. These factors were too difficult for Kuznets
Allen D. Truell and his team to measure.
• Illegal activities such as gambling and drug traffic-
ing. These factors are also difficult to estimate but
Kuznets excluded them from GNP because he
GROSS DOMESTIC deemed them a “disservice” to the economy.
PRODUCT (GDP) • Goods and services that are bartered. These were
Led by the auto industry, the United States economy grew excluded because they cannot be measured.
rapidly in the 1920s, generating more jobs, more income, • Sale of intermediate goods (raw materials).
and more free time that the American consumer had in
• Sale of used goods (used cars, furniture, etc.).
order to spend. As long as people were employed, paying
for goods and services, there was really no need to meas- • Purely financial transactions such as sale of stocks
ure how the economy was doing. However, in the 1930s, and bonds.
the American economy went bust and a frustrated Con- • Imports (goods made outside the United States).
gress asked if there was any way to measure the depth of
The GDP is the ultimate benchmark that measures
the Great Depression.
the expansion and contraction of the U.S. multitrillion
On January 4, 1934, economist Simon Kuznets dollar national economy. It covers everything that is pro-
(1901–1985), professor at the University of Pennsylvania,
duced and sold in the marketplace. Bankers, investment
sent to the Senate a report entitled “National Income:
brokers, and government officials use the GDP to deter-
1929–1932,” the first accounting of U.S. productivity,
mine such things as interest rates, investment opportuni-
essentially the gross national product (GNP). More than ties, and tax rates. The GDP is not the only measure of
4,500 copies of this report were sold in just eight months. output, however, as economists use the GDP because it is
The basic concept that Kuznet had was to limit this
the most comprehensive of output measures. This meas-
accounting measurement to the marketplace, and thus to
ure is important because it helps societies understand both
the amount that consumers paid for goods and services. inflation and employment.
Until 1992, the term GNP was used to refer to the total In the flow of payments in the economy, where does
dollar value of all finished goods and services produced for one measure? Consider, for example, an automobile. The
consumption in society during a particular period of time
mining operator receives income from the sale of iron ore,
(usually one year). In 1992 the Commerce Department
the mill owner receives income from the sale of finished
began to compute gross domestic product (GDP) instead
steel, and the automobile manufacturer receives income
of GNP. The differences between the two are slight and from the sale of the finished car. In order to avoid the
involve how to count earning of assets owned by foreign- inaccuracy of counting the same money three times,
ers. GNP counts the earnings in the homeland of the Kuznets decided to use only final sales. Thus the amount
owner of the asset, while GDP counts the earnings of a paid to the dealer for the car is the only amount used in
manufacturer in the country in which the assets exists. For calculating GDP. The labor cost of the workers at all three
the United States, there is virtually no difference between locations is added to GDP. In essence, the price of the
the two measures. automobile includes the cost of the materials purchased
There are three basic components that determine the from suppliers. The value added to manufacture the auto-
U.S. GDP: mobile can be found by deducting the cost of one prod-
uct from the total cost of the automobile.
1. Consumption, the amount that consumers pay for The more goods and services a country produces, the
goods (durable and nondurable).
healthier that country’s economy becomes. There is a
2. Investment, the amount of money spent on new major flaw in measuring economic success, however, in
production facilities, that is, plants and facilities. that when GDP (production) increases, negative external-

358 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION