My son asked me a question about a college econ assignment related to GDP. My reading of GDP is that it is the value of goods sold, not goods produced. So if a company makes 10,000 cars, sells 9,000 for $20,000 each, and 1000 cars go into inventory, the company’s contribution to GDP is $180,000, not $200,000. Am I right?
I infer this from the material I’ve read but I haven’t seen a reference that comes out and says this explicitly.
GDP is intended to be a measure of production: Gross Domestic Production.
Goods that are produced but not yet sold are added to inventories. Inventories are considered investment production: see here for the Wikipedia link or see here for a university website link.
I could also point out that selling 9,000 cars at 20,000 dollars each would mean 180 million in sales, not 180 thousand. GDP in your example increased by 200 million, of which 20 million was inventory investment.
Thank you very much. That was the missing link.
And yeah, I should not be an accountant for a car company.
I hated the calculation of GDP in economics. It’s the only thing that I really never learned properly from the Macro class I took. Thankfully, they don’t care about your ability to calculate GDP in becoming a CPA.
Unfortunately GDP usually also includes purely financial items. These often produce few jobs and no tangible goods. This can be a very large part of the GDP number. It can mislead as to the real health and productivity of the economy.
When people in financial services are paid for their work, that’s included in GDP. But the mere act of buying and selling already existing assets is not included.
I don’t know anyone familiar with GDP who would say “purely financial items” are included in the calculations. The entire concept was specifically designed to exclude the daily trading of previously existing assets, because, say, the buying and selling of stock in the secondary markets does nothing to contribute to the production of the country. Pushing paper doesn’t count.
Financial and insurance services make up a little less than 5% of GDP.
Employment in financial and insurance services is a little more than 7 million, out of a total US workforce of around 151 million, which is a little less than 5% of employment.
The number of jobs in finance and insurance, compared to the total workforce, is almost exactly commensurate with its contribution to GDP.
This source shows 7.3%. Where does the discrepancy come from?
Real estate, which adds another 2.7 million workers.
Real estate is included in “Financial Activities”, but that category splits into “Finance and Insurance” which is what I was counting and also “Real Estate” as its own category. I was looking up figures for the strict Finance and Insurance category for both the GDP and employment calculations. Real estate seemed even further from “purely financial” than even basic financial services.
Did you even click my link? It shows “Finance, insurance, real estate, rental, and leasing” as 20.6% of GDP. (That’s Twenty with a T. 
)
I did, but quickly, so I guess I misread the line.
Re-checking the previous cite I looked up (which is also from the FRED website of the St. Louis Fed), it puts Financial Services and Insurance at around 750 billion for the latest quarter, which is under 5% of real output, which is the number I reported. Hmmm…
Ahhhh, I missed the PCE component of my cite. That changes things.
Yours is correct. It includes the entire industry. That is a discrepancy with employment. My bad on that one.
Question.
Suppose a company based in U.S. has everything but head office, overseas. Manufacturing in some other country. Using materials sourced from various other countries. So almost all economic activity and it’s benefits are not in the U.S. What portion of it’s total activities would be included in U.S. GDP? Roughly. I realize there are complex methods for diverting profits away from higher tax rate places. But if one were trying to produce a better looking GDP number. Could that company’s activities be included more than they actually are?
GDP is an intended as a measure of Gross Domestic Production. Domestic in this case meaning production that occurs within the country’s borders.
In your example, almost all output will be considered as part of GDP elsewhere in whatever country production is located. Basically only head office salaries will count for US GDP numbers.
This is the difference between GDP and GNP: Gross National Product. GNP counts income derived from the US citizens’ ownership of resources/factories/machines in foreign lands as part of US national numbers, and even US citizen wages who are working elsewhere. But this is a bit silly when we’re trying to measure the strength of local US production, and so almost everyone today focuses on domestic numbers instead, which is production inside the country regardless of who owns the machines or the nationality of the workers.
Otherwise known as the FIRE sector. None of these functions produce anything and should be DEDUCTED from GDP as costs. This is also true of the entire legal establishment. A law firm billing at $500 per hour is not the same as company building washing machines. Most advertising should also be deducted as a cost as well. Prison guards, police, security guards; all are costs.
GDP in the US is full of fluff like this which explains how GDP per capita is about 35K, or about $140K for a family of four, but, most people would have difficulty with an unexpected expense of $500!
How does GDP count sale of used goods? It was mentioned upthread that selling an existing item may not count, but services do count towards GDP. If you sell something on consignment, somebody is selling it for you, and getting paid for their service.
An attempt can be made to distinguish between the price of the used item (to be excluded) and the price of the new service (to be included).
Take a used car dealership for an example.
A used car dealership purchases already existing goods – items that were produced in a previous year and so should not count toward this year’s production – and then resells those items to other people. This dealership is providing a service: connecting a buyer and a seller through time. The sellers gets to dispose of their car now, and the eventual buyer can purchase the car at some later point in time without the seller having to wait. So if the used car dealership buys an older car for 5000 and later resells the car later for 6500, we can say that Value Added by the dealership is the difference between those numbers. That is the measure of the service provided. This is similar to EBay: a used good changes hands (not counted) but EBay takes a fee from the sale (counted).
Housing is another easy example. A house being built is counted as a new investment good and is thus part of current GDP. An older house being sold is not counted as part of GDP, but the commission of the real estate agent who helps sell the house is a service, and that would be counted. None of this is perfect. There are always tradeoffs between the Platonic ideal of GDP and its actual real-world measurement, but when there seems to be a decent method of distinguishing between the price of a used good and the price of the new service, that method is used.
I believe it was the philosopher Archie Bunker who boasted that America has the grossest national product. It may also be worth noting that the GDP/GNP calculations make no “moral” judgements: the cleanup costs of, say, a massive oil spill may well boost the number.