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- [Narrator] What is
Gross Domestic Product,
otherwise known as GDP?
Gross Domestic Product is the market value
of all finished goods and services
produced within a country in a year.
Think about the economy
like a giant supermarket
filled with millions of goods,
like dresses, and washing machines,
and services,
like dog walking and massages.
Every time a finished good
or service is sold, we ring up the price.
At the end of the year,
we ring up the total -- that's the GDP.
Let's look more closely
at some of the details.
Notice that we said GDP
is the market value
of all finished goods and services.
A finished good or service is one
that will not be sold again
as part of some other good.
When a bakery buys
flour, eggs, and butter,
we don't count these sales in GDP
because these goods aren't finished.
They are intermediate goods that,
when combined, will become
a finished good -- a cake, for example.
But, if a consumer buys an egg
to make an omelet,
the egg is a finished good
because it won't be sold again
as part of some other good.
In other words, our GDP supermarket
is like a real supermarket.
At the GDP register, we ring up
the eggs sold to consumers,
and the cakes, but we don't ring up
the eggs the baker used to make the cake.
There are also goods
that are used to make other goods,
but are still considered finished goods.
These are called capital goods.
If Caterpillar produces a tractor
and sells it to a farm,
the tractor is considered a finished good.
The tractor is finished
and its value is added to the GDP.
Although the tractor is used
to make other goods,
it won't be sold again
as part of another good,
so the tractor is still a finished good.
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The GDP is the market value
of all finished goods and services
produced within a country in a year.
GDP only counts production.
If an old house is sold this year,
that doesn't add to GDP
since the house wasn't produced this year.
Only the sale of new houses add to GDP.
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GDP also only counts goods and services
produced within a country.
If you buy a bottle of wine
imported from France,
that adds to France's GDP,
not to U.S. GDP.
On the other hand, a computer
produced in the United States
and exported to France
adds to the U.S. GDP.
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Let's go back to the definition
one more time,
to see some of the limits of GDP
as a measure of economic production.
GDP is the market value
of all finished goods and services
produced within a country in a year.
If a good isn't bought
and sold in a market,
then it's not typically counted in GDP.
Why not? Counting the market value
of, say, all the breakfast cereal
produced in the U.S. is easy,
at least in principle.
Just add up the price every time
a box of cereal is sold.
Since market prices are observable,
every statistician who counts carefully
will come up with pretty much
the same number.
But, without market prices,
there's no easy or agreed upon way
to calculate how much a good is worth.
Polar bears, for example,
aren't counted in GDP.
The statisticians and economists
who calculate GDP
have nothing against polar bears.
The problem is that there's no easy way
to calculate how valuable polar bears are.
Just because GDP
doesn't include polar bears
doesn't mean that
we can't love polar bears.
And if polar bears were included in GDP,
that wouldn't require us
to love polar bears either.
Ultimately, GDP is just a number.
But it's a useful number.
In the next few videos, we'll show
how the GDP number can be used
as a measure of the standard of living.
But for that, we'll have to make
a distinction between the Nominal GDP,
what we have just discussed so far,
and Real GDP. So stay tuned.
- [Narrator] If you want to test yourself,
click "Practice Questions."
Or, if you're ready to move on,
you can click "Go to the Next Video."
You can also visit MRUniversity.com
to see our entire library
of videos and resources.
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