The market value of all final goods and services produced within a Gross Domestic Product GDP country s borders in a year Does not matter whether or not it is a foreign or American company as long as it is inside the border of the United States it is counted in the GDP Issues involved in calculating GDP 1 Market Value Value goods and services at market prices If no market prices exist value good or service at cost 2 Final goods and services are products purchased by final consumers Excludes intermediate goods Ex Tires sold to car manufacturers will not be counted in GDP however tires sold from a mechanic or tire shop to a consumer will be counted in GDP This helps to avoid double counting things in the GDP and over valuing the true value in the GDP Ex Loaf of Bread Activity Farmer sells 0 20 of wheat to a miller Miller sells 0 40 of flour to a baker Baker sells 0 80 of bread to a grocer Grocer sells 1 of bread to final consumer Value added 0 20 0 40 0 20 0 20 Total 1 00 3 Non market transactions are excluded Home production cleaning your own home painting your own home babysitting younger brother and sister If you pay someone else to paint your home on the books and it is recorded in their earnings then it will count towards GDP Illegal markets such as drug trades are not included in GDP Underground economy such as people hired under the table are not recorded by the government and therefore do not contribute to the GDP 4 Non productive transactions are excluded such as payments to people who are on government assistance When the government sends people on welfare their checks they do not count towards GDP Gifts are not included in the GDP such as when somebody sends you money for your birthday 5 Secondhand goods are excluded such as used cars bikes etc 6 Goods produced but not sold are included in GDP as part of inventory and regarded as investment Nominal vs Real GDP Nominal GDP measures output using current prices Real GDP Measures output using constant prices Use a base year for prices and then use the prices from the base year in the following years with the output quantity of the individual years to find real gdp
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