Understanding Gross Domestic Product

In the last chapter we observed that GDP is subtle. In this chapter we clarify some of it subtleties. What conceptual problems arise in defining GDP and its components? How are GDP data collected and processed? How are the detailed national accounts related to the four accounting identities developed in Chapter 2? How to measure the size of an economy is not straightforward. To reach our modern concepts took centuries of development. National income is not money. Fundamentally, it is all the goods and services that the nation produces. But how can we add up such disparate products as shoes, ships, sealing wax, cabbages, and concert tickets? This is, of course, an old problem known to every schoolchild from arithmetic class. We must find a common unit. So, even though the wealth of the nation does not consist of money, the money value of each product provides the common measure that permits us to add up disparate products. (As we saw in Chapter 2, section 2.4, even after we have expressed GDP in dollars, we have to account for the changing value of the dollar itself. In Chapter 8 we shall consider how to compare the GDPs of different countries that use different monies.) At the beginning of Chapter 2 we quoted the definition of gross domestic product used by the U.S. Commerce Department's Bureau of Economic Analysis: Gross domestic product is “the market value of all the final goods and services produced by labor and property located” within the borders of a country within a definite period .