Gross Domestic Product (GDP)

Now, let's break down this definition to better understand what GDP is, what it measures, and what it does not measure.

Market Value

GDP sums the total production of the economy. To record and sum the production of all final goods and services, given their vast variety, GDP uses the prices of each of these goods and services. This approach provides a uniform measure for all quantities, making them possible to sum.

Of All

GDP aims to be a broad measure, including all goods and services produced within the economy, except those produced illegally. There is always a debate about whether the production of illegal goods like drugs or services like prostitution should be included. Additionally, determining the value of these goods and services is challenging because they are usually traded in black markets. Consequently, some countries choose to include them, while others do not.

The case of housing is special. For people renting their homes, it is easy to calculate the value of this expense as it is the rent paid by the tenant and the monthly payment received by the owner. However, for homeowners, it is more difficult. In this case, an estimated value is calculated, which would be the rental value of the home. Effectively, GDP assumes homeowners rent to themselves, and this imputed rent is added to both income and expenditure, thus increasing GDP.

On the other hand, goods and services that never enter the market are excluded from measurement. This is because they are produced and consumed at home. For example, anything produced for an employer is part of GDP, but if the same is produced for the family, it does not count towards GDP as it never enters the market.

Goods and Services

GDP includes both tangible goods and intangible services.

Final

GDP only sums goods and services intended for final consumption. For example, if one company buys an intermediate good (a good used in the production of another good or service) from another company to use in its own production process as an input, the value of this product is not added to GDP. Instead, only the production of the second company is included. This is because the final product's price already includes the prices of all intermediate goods used in the production process. Therefore, including intermediate goods in GDP would result in double counting.

An exception occurs when a company buys a good or produces it itself and adds it to its inventory instead of using it immediately for production or sale. In this case, these goods are added to GDP as inventory investment. Later, when these goods are used in production or sold, their value is subtracted from GDP.

Produced

GDP includes goods and services produced within the period being measured. It does not include transactions involving products made in previous periods. Consequently, second-hand markets do not add to GDP.

Within an Economy

Production is added to GDP if it occurs within the geographical boundaries of a country, regardless of the producer's nationality. For example, if a US company invests in a European country like France and its production occurs within France's geographical limits, this production is added to France's GDP.

Over a Specified Period

GDP measures the value of production within a specific time interval. Usually, statistical offices report GDP quarterly and annually.

When looking at quarterly data, it's common to see a note saying "annual rate" or similar. This means that the quarterly GDP is multiplied by 4, representing the four quarters in a year. This convention allows quarterly and annual figures to be comparable.

Seasonal Adjustment

Additionally, when quarterly data is presented, these are time series adjusted for seasonal variations through a statistical process. This adjustment is necessary because an economy experiences increased production during certain times of the year, such as during special holidays. The adjustment aims to detect significant changes beyond these temporary variations, eliminating seasonal cycles. The data reported in economic news and journals always include this adjustment.