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♪ [music] ♪

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- [Narrator] What is
Gross Domestic Product,

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otherwise known as GDP?

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Gross Domestic Product is the market value
of all finished goods and services

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produced within a country in a year.

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Think about the economy
like a giant supermarket

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

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and services,
like dog walking and massages.

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Every time a finished good
or service is sold, we ring up the price.

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

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Let's look more closely
at some of the details.

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Notice that we said GDP
is the market value

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of all finished goods and services.

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A finished good or service is one

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that will not be sold again
as part of some other good.

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When a bakery buys
flour, eggs, and butter,

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we don't count these sales in GDP
because these goods aren't finished.

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They are intermediate goods that,
when combined, will become

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a finished good -- a cake, for example.

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But, if a consumer buys an egg
to make an omelet,

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the egg is a finished good

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

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In other words, our GDP supermarket
is like a real supermarket.

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At the GDP register, we ring up
the eggs sold to consumers,

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and the cakes, but we don't ring up
the eggs the baker used to make the cake.

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There are also goods
that are used to make other goods,

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

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If Caterpillar produces a tractor
and sells it to a farm,

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the tractor is considered a finished good.

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

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Although the tractor is used
to make other goods,

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it won't be sold again
as part of another good,

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so the tractor is still a finished good.

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♪ [music] ♪

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The GDP is the market value
of all finished goods and services

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produced within a country in a year.

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GDP only counts production.

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

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since 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 goods and services
produced within a country.

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If you buy a bottle of wine
imported from France,

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that adds to France's GDP, 
not to U.S. GDP.

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On the other hand, a computer
produced in the United States

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and exported to France
adds to the U.S. GDP.

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♪ [music] ♪

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

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to see some of the limits of GDP
as a measure of economic production.

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GDP is the market value
of all finished goods and services

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produced within a country in a year.

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If a good isn't bought
and sold in a market,

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then it's not typically counted in GDP.

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Why not? Counting the market value

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of, say, all the breakfast cereal
produced in the U.S. is easy,

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at least in principle.

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Just add up the price every time
a box of cereal is sold.

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Since market prices are observable,
every statistician who counts carefully

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will come up with pretty much
the same number.

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But, without market prices,
there's no easy or agreed upon way

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to calculate how much a good is worth.

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Polar bears, for example,
aren't counted in GDP.

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The statisticians and economists
who calculate GDP

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have nothing against polar bears.

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The problem is that there's no easy way
to calculate how valuable polar bears are.

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Just because GDP
doesn't include polar bears

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doesn't mean that 
we can't love polar bears.

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And if polar bears were included in GDP,

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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.

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In the next few videos, we'll show 
how the GDP number can be used

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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,

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what 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."

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Or, if you're ready to move on,
you can click "Go to the Next Video."

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You can also visit MRUniversity.com

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to see our entire library 
of videos and resources.

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♪ [music] ♪