Discuss what is, and what is not, included in calculating GDP?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Gross domestic product (GDP) is a measure of economic activity in an economy in a given year.  It consists of the market value of all final goods and services produced in the territory of a given country in a given year.  There are many things that GDP does not count.  Let us look at some of them.

  • Sales of used items.  GDP is a measure of current production.  When you sell a used car, nothing new is produced.  Therefore, these are not counted.
  • Intermediate goods.  These are goods that go into other goods which are then sold to consumers.  For example, if a bakery buys flour to make bread, the flour is not counted.  Its cost is part of the cost of the bread.  If it were counted, we would be overstating the value of the things we produce.
  • Unpaid work.  GDP only counts market values.  It does not count the value of things that are not paid for.  An example of this would be the work done by a person who cooks their family’s meals or who cares for their family’s children.
  • Goods produced outside the country.  Even if a company is American-owned, the things that it produces in other countries (like Nike shoes made in Vietnam) are not counted as part of the GDP of the US.
kipling2448's profile pic

kipling2448 | (Level 3) Educator Emeritus

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One of the best ways to think about Gross Domestic Product, or GDP, is to compare it with Gross National Product, which, prior to the 1990s, was the standard used in the United States to determine economic growth from year to year. Gross National Product (GNP) is the value of all goods and services produced by a given country during a single year, including the value of goods produced overseas by multinational corporations. In other words, GNP includes in its calculations of economic growth the value of production irrespective of where in the world that production occurs. In contrast, GDP limits itself to the value of goods and services produced within the borders of the country in question. In 1991, the United States, which has the largest economy in the world, switched from measuring its economic growth from GNP to GDP, thereby eliminating in calculations of economic growth the value of goods and services produced in foreign countries by U.S.-owned corporations.

In addition to calculating the value of goods and services produced within the borders of a given country, GDP also includes the value of transactions in goods and services involving the governments of a given country. Government spending contributes to the economy, so its included in the calculations of GDP. Because central or federal governments are such large spenders of money, as well as state and local governments, their share of GDP is usually significant. In the United States, according to figures provided by the federal government, government spending, federal, state and local, constitutes 36 percent of the nation's GDP--a very sizable portion of GDP.

While calculations of GDP include the value of goods and services produced in a given country, these figures do not tell the entire story of the state of a nation's economy. Among the figures not reflected in calculations of GDP are the scale of disparities between wealthy, middle class and poor within a country; the estimated value of work performed by volunteers, which, by definition, does not involve an exchange of material value but which does represent a calculable value; the estimated value of work performed in the service of one's home (i.e., housekeeping); the value of goods and services sold involving previously-owned or used items (such as the value of goods sold at so-called flea markets and at neighborhood yard or garage sales); and illegally-transferred goods and services, such as the trade in illegal drugs and in prostitution. While this might seem trivial, it is, in actuality, quite significant given the level of drug abuse in the United States. Estimates of the total value of illicit drugs sold in the United States annually range from a couple of hundred billion to over $700 billion. Even at the low-end of that spectrum, the impact on calculations of GDP would be significant. Add in the estimated $14-15 billion spent annually in the United States on prostitution, and the numbers of illicit economic activity not calculated as part of GDP goes up considerably. [See on these matters this source and this one.]

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