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♪ [music] ♪

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- [Instructor] What is gross domestic product,
otherwise known as GDP? Gross domestic

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product is the market value of all
finished goods and services produced

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within a country in a year. Think about
the economy like a giant supermarket

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filled with millions of goods like
dresses, and washing machines, and

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services like dog walking and massages.
Every time a finished good or service is

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sold, we ring up the price. At the end of
the year, we ring up the total - that's the

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GDP. Let's look more closely at some of
the details. Notice that we said GDP is

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the market value of all finished goods and
services. A finished good or service is

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one that will not be sold again as part of
some other good. When a bakery buys flour,

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eggs, and butter, we don't count these
sales in GDP because these goods aren't

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finished. They are intermediate goods that,
when combined, will become a finished good -

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a cake, for example. But, if a consumer
buys an egg to make an omelet, the egg is

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a finished good because it won't be sold
again as part of some other good. In other

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words, our GDP supermarket is like a real
supermarket. At the GDP register, we ring

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up the eggs sold to consumers, and the
cakes, but we don't ring up the eggs the

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baker used to make the cake. There are
also goods that are used to make other

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goods, but are still considered finished
goods. These are called capital goods. If

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Caterpillar produces a tractor and sells
it to a farm, the tractor is considered a

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finished good. The tractor is finished and
its value is added to the GDP. Although

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the tractor is used to make other goods,
it won't be sold again as part of another

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good, so the tractor is still a finished good. 
♪ [music] ♪ The GDP is the market value of all

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finished goods and services produced
within a country in a year. GDP only

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counts production. If an old house is sold
this year, that doesn't add to GDP since

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the house wasn't produced this year. Only
the sale of new houses add to GDP.

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♪ [music] ♪

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GDP also only counts

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goods and services produced 
within a country. If you buy a

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bottle of wine imported from France, that
adds to France's GDP, not to U.S. GDP. On

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the other hand, a computer produced in the
United States and exported to France adds

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to the U.S. GDP.

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♪ [music] ♪

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Let's go back to the definition 
one more time, to see some of

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the limits of GDP as a measure of economic
production. GDP is the market value of all

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finished goods and services produced
within a country in a year. If a good

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isn't bought and sold in a market, then
it's not typically counted in GDP. Why

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not? Counting the market value of, say,
all the breakfast cereal produced in the

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U.S. is easy, at least in principle. Just
add up the price every time a box of

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cereal is sold. Since market prices are
observable, every statistician who counts

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carefully will come up with pretty much
the same number. But, without market

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prices, there's no easy or agreed upon way
to calculate how much a good is worth.

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Polar bears, for example, aren't counted
in GDP. The statisticians and economists

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who calculate GDP have nothing against
polar bears. The problem is that there's

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no easy way to calculate how valuable
polar bears are. Just because GDP doesn't

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include polar bears doesn't mean that we
can't love polar bears. And if polar bears

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were included in GDP, that wouldn't
require us to love polar bears either.

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Ultimately, GDP is just a number. But it's
a useful number. In the next few videos,

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we'll show how the GDP number can be used
as a measure of the standard of living.

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But for that, we'll have to make a
distinction between the Nominal GDP, what

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we have just discussed so far, and Real
GDP. So stay tuned.

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- [Narrator] If you want to test yourself,
click "Practice Questions." Or, if you're

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ready to move on, you can click "Go
to the Next Video." You can also visit

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MRUniversity.com to see our entire 
library of videos and resources.

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♪ [music] ♪