What is Gross Domestic Product?

Picture the economy as a giant supermarket, with billions of goods and services inside. At the checkout line, you watch as the cashier rings up the price for each finished good or service sold. What have you just observed?

The cashier is computing a very important number: gross domestic product, or GDP.

GDP is the market value of all finished goods and services, produced within a country in a year.

But, what does "market value" mean? And what defines a "finished good"?

These, and more questions, percolate inside your head. Meanwhile, the cashier starts ringing up the total, and you’re left confused. An array of things pass by you — A bottle of wine. A carton of eggs. A cake from the local bakers. A tractor, of all things. A bunch of ballpens. A bag of flour.

In this video, join us as we show you how to make sense of this important economic indicator. You’ll learn how GDP is computed, and you’ll get answers to some pretty interesting questions along the way.

Questions like, “Why are the eggs in my homemade omelet part of the GDP, but the eggs my baker uses are not? Why does my bottle of French wine contribute to France’s GDP, even if I bought it in the United States?”

Most importantly, you’ll also learn why polar bears aren’t part of the GDP computation, even if they’re incredibly cute.

So, buckle in for a bit—in the following videos we’ll dive into specifics on GDP.

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- [Instructor] 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.
♪ [music] ♪ 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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