Gross domestic product

Gross domestic product (GDP) is the total market value of the goods and services produced by a nation’s economy during a specific period of time. It includes all final goods and services—that is, those that are produced by the economic resources located in that nation regardless of their ownership and that are not resold in any form.

The GDP is usually measured for the period of one year.

Measuring GDP

The GDP can be arrived at by three separate means: as the sum of goods and services sold to final users, as the sum of income payments and other costs incurred in the production of goods and services, and as the sum of the value added at each stage of production. Although these three ways of measuring GDP are conceptually the same, their calculation may not result in identical estimates of GDP because of differences in data sources, timing, and estimation techniques.

In general, the source data for the expenditures components are considered more reliable. In this method, the GDP is calculated by the Bureau of Economic Analysis as following:

• Personal consumption expenditures, which measures the value of the goods and services purchased by persons — that is, households, nonprofit institutions that primarily serve households, private noninsured welfare funds, and private trust funds.
• Gross private fixed investment, which measures additions and replacements to the stock of private fixed assets without deduction of depreciation. Nonresidential fixed investment measures investment by businesses and nonprofit institutions in nonresidential structures and in equipment and software. Residential fixed investment measures investment by businesses and households in residential structures and equipment, primarily new construction of single-family and multifamily units.
• Change in private inventories, which measures the change in the physical volume of inventories owned by private business valued in average prices of the period.
• Government consumption expenditures and gross investment, which comprises two components. Current consumption expenditures consists of the spending by general government in order to produce and provide goods and services to the public.
• Net exports of goods and services, which is calculated as exports less imports. Exports consist of goods and services that are sold or transferred by U.S. residents to foreign residents. Imports, which are subtracted in the calculation of GDP, consist of goods and services that are sold or transferred by foreign residents to U.S. residents.

Measuring growth

Economic growth is often measured by the Gross domestic product. It does not represent production, but overall spending, and is dependent on the techniques that are applied to the calculation of the respective price indices. To calculate a "real GDP", the statistical offices create a basket of goods and compare the prices of the goods in this basket to the respective reference periods. But there is no objective representative basket of GDP other than as a statistical construct based on many disputable assumptions, and there is no common standard which would allow the comparison of one period’s production to the other when in fact current output in terms of new, obsolete and modified goods and services is quite different from that of the past. Money prices do not measure anything. Prices only have a meaning as relative prices as they reflect the exchange ratios on the market.

In a private market economy the aims of economic activity are highly diverse and represent individual and subjective valuations. For an economy that is to serve multiple private needs, the calculation of economic growth makes little sense, if any at all. One may add up nationwide the various monetary prices of the goods and services that were sold, but besides the aggregation of the monetary values of diverse items – what is the true and reliable informational value of this exercise?

Each good and service has a different value for each user, and there is no common standard of value available. This is even more so the case, when new products and new kinds of services come to the market. Valuations are not only heterogeneous among persons, but also differ for the same person according to the specific circumstances. Human beings have different needs and wants in different situations, and they experience changes of taste over time. Quality itself is not an attribute inherent to the things, but it is a valuation by economic actors.

When Sir John Cowperthwaite, who is credited for turning Hong Kong into a thriving global financial centre, was asked what was the one reform that he was most proud of, he said "I abolished the collection of statistics." Sir John believed that statistics are dangerous, because they enable social engineers of all stripes to justify state intervention in the economy.

History

This concept of the GDP can be traced back to 1932, when the Commerce Department hired economist Simon Kuznets to produce an end measure of the economy. Kuznets's passion was collecting and organizing the national-income accounts of the United States. On that front, Kuznets helped the Commerce Department standardize the measurement of gross national product (GNP, yesterday's GDP), but even he disapproved of using it as a general indicator of national welfare:

The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

The abuses of national income estimates arise largely from a failure to take into account the precise definition of income and the methods of its evaluation which the estimator assumes in arriving at his final figures.

External links

• Gross domestic product on Wikipedia and lists of countries by GDP
• Gross domestic product on Answers.com
• Does the GNP Measure Growth and Welfare? by Oskar Morgenstern, February 1975
• Inventories Don't Kill Growth — People Kill Growth by Robert P. Murphy, March 2010
• C + I + G = Baloney by Patrick Barron, June 2010