Gdp what is not included

No notes for slide. Gross Domestic Product [What is not included] 1. GDP — measures legal production in U. Intermediate Goods — components of the final good.

Ford buys batteries or tires for its cars. KFC buys chickens to eventually sell to customers. His commission would count. Boots produced in are bought in a Thrift Store in They also have not been produced again. You are buying his services. Stock Market T ransactions B. Public Transfer Payments C. P rivate Transfer P ayments 8. Purely Financial Transactions — stocks, bonds, CDs.

There is no current production. Exchanging one financial asset for another [swapping bits of paper] Buying stock is not buying a product but buying ownership of the firm. Buying bonds is making a loan. GDP - what is not counted [ 3] 9. Public Transfer Payment s —welfare, unemployment, social security. Making money illegally drug money and making it look like it was legally earned like buying a laundry mat or car wash that deal in cash and report it as legally earned.

Illegal business activity, because it goes unreported, also does not count. Illegal business activity is also not counted. Money Laundering Cabdriver not reporting all of his income c.

Self employed cheat the most. Off-the-books cash transactions d. Work in your own household or volunteer work in the community does not count because there was no payment. You need to do some of this housework. Non-market Transactions Are Not Counted Remember, we are measuring production inside the U. For example, imagine what would happen if government statisticians first counted the value of tires produced by a tire manufacturer, and then counted the value of a new truck sold by an automaker that contains those tires.

In this example, the value of the tires would have been counted twice-because the value of the truck already includes the value of the tires. To avoid this problem, which would overstate the size of the economy considerably, when government statisticians compute the GDP at the end of the year, they count just the value of final goods and services in the chain of production. Intermediate goods, which are goods that are used in the production of other goods, are excluded from GDP calculations.

From the example above, government statisticians would count the value of the truck plus the value of any tires that were produced but not yet put on trucks, since at the end of the year, those tires are counted as final goods. Next year, when the tires are put on new trucks, GDP will include the value of the new trucks less the value of the tires that were counted this year. If this sounds complicated, remember the point is to only count things that get produced once.

The concept of GDP is fairly straightforward: it is just the dollar value of all final goods and services produced in the economy in a year. GDP—along with how it is changing every few months—is a full-time job for a brigade of government statisticians. Notice the items that are not counted into GDP, as outlined in the list above. The C component stands for private spending. This considers the fact that consumers spend money on buying groceries and other related activities.

This is the biggest component of the GDP of any economy and it is two-thirds of the American economy. An economy that has high consumer levels indicates that the consumers are very willing to spend their money. A low confidence level indicates uncertainty about the future. The G stands for the consumption and expenses made by the government. Governments often spend money on things such as payroll, equipment, and infrastructure.

The importance of government spending is often highlighted when business investments and consumer spending hit a decline. NX represents net exports gets measured using total export minus the total imports.

A country with a current account surplus will see a boost in its GDP. A country having a high deficit will witness an adverse effect on its GDP. This is a case where businesses invest money in their business activities such as purchasing machinery. This is a vital part of GDP because it leads to an increase in production capacity and helps in boosting employment rates. The reverse of the spending approach is the income approach.

This method is the central point between the other approaches. The income earned by the other production factors such as the rent paid on land, wages for labor and the return on the capital in the form of interest is all components. This approach takes into consideration the adjustments for items that may not show in the payments made to the production factors. There are quite several taxes such as property taxes and sales taxes labeled as indirect business tax.

Because GDP is a function of the monetary value of services and goods, it is dependent on inflation. The interesting thing about this is that it would not affect the number of services or goods produced per time. So, by taking a look at the unadjusted GDP of an economy, it is quite complex to tell if the GDP improved because of an increase in production or price.

This is the primary reason why experts came up with a modification for inflation to get the real GDP of an economy.

By modifying the production per year for the price levels for a year in review, the experts make adjustments for the impact of inflation. Nominal amounts are expressed using current dollar prices, i. Thus, economists sometimes are interested in figuring out the changes in real income, excluding the payments for rise in prices. Once price indices are calculated, real GDP can be calculated using the above formula.

Usually, an index number of is assigned to some base year. For instance, if one is interested in GDP growth during the post WWII era, one can assign an index of to or , and then compute the price indices for other years. Which base year should one use? It all depends on the purpose of comparison. For instance, price of personal computers keeps falling each year. These are the transactions outside the market, and hence there is no reliable price information about them.

The most important transaction excluded from the GDP is the services of houswives. These are not sold in the market, and hence are not included the GDP. This exclusion understates real welfare. Thus, welfare is often understated in LDCs. On the other hand, in some European countries, different families pay one another for babysitting expenditures and get tax credit, and these expenditures are included in GDP.

Thus, GDP tend to overstate welfare in these countries. There is not much data about the magnitude of the underground economy, which includes both legal and illegal economies. They are not excluded because they are immoral, but the amounts are not reported. Also, cash payments "under the table" to corrupt officials and businessmen are not reported.

Also, a significant amount is underreported by self-employed people who are doing business legally. Also, black markets are large in developing countries. Most people can get a part time job, in addition to their regular jobs, by working in the evenings and on weekends. However, they choose not to. Because they value leisure more than the additional income they could earn!

You cannot go to parties, watch TV, or go to the movies. If somehow these people are forced to work extra hours, GDP will go up, but not their welfare. Many industries produce pollution in the production process. For instance, a steel mill produces pollution while producing steel products. Likewise, the oil industry pollutes the ocean. Only the value of outputs produced is included in GDP, but not the pollution. If we are interested in measuring welfare, the cost of pollution should be subtracted from the value of outputs.

If the industry or goverment cleans up the mess, resources are used up, and their value is included in GDP. Thus, GDP overstates the actual value of outputs, whether the polluted environment is cleaned up or not. GDP misses an important element of welfare. For example, every other year the quality of personal computers seem to double but their prices halved. While technological advances often improve the quality of the products and hence welfare, they lower prices and hence decrease GDP.

There are other measures of social wellbeing. Life expectancies, infant mortality rates, crime rates, health care, etc. However, despite all its problems, GDP is a single index that measures the value of outputs of a nation. It tends to be positively related to wellbeing, but not a precise measure of social welfare. Each month the government announces the unemployment rate, that so many lost jobs, etc.

To verify whether one is unemployed, the government needs to contact everybody. In the United States this is done once a decade decennial Census of Population It is costly to interview all workers. Accordingly, the government conducts census only once in 10 years. Also, each month the Census Bureau interviews about 60, households or about , individuals. Often the success of a President's economic policy is measured by the number of jobs created.

This is a very dangerous criterion. Remember: Association is not causation! Effect of Fukushima disaster.

Obviously, people suffer from natural disasters.