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Friday, June 4, 2010

Macroeconomics, Post 1, GDP

After a disappointing semester at B-school, I've decided to spend more time blogging about my classes.  I hope that this will encourage my thinking about topics in class, and applying them (hopefully correctly!)

So our Macroeconomics text is posted here by Amazon Associates.  It's William J. Baumol's Economics: Principles & Policy, 11th edition.

So while reading on my lunch hour, I learned some pretty interesting things about the GDP which I didn't know before.  I'd definitely heard about it, and had a very vague sense of what it was, but I never looked too closely at the definitions, which are interesting.

Nominal v. Real GDP.  This is the same definition from Micro.  Nominal is priced in today's dollars, Real is priced in terms of change over previous years, adjusted for inflation.

GDP:  "The sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time, usually a year."

Some interesting things to note:  Products that are sold on the secondary market, are not counted in the GDP!  I found that to be astonishing given that so much of our income goes to second hand items.  We spent 600 dollars on a used couch last year.  There are some good reasons for this, and some that I don't understand.  No one but me will ever know about the used couch.  It was bought with cash, and no record of the transaction exists with any official source.  So it's impossible to track.  However, a used car dealership doesn't add to the GDP?  That seems a bit extreme, because they do track those sales, and they do report income to the IRS, and they are taxed on that income.  No, GDP just includes goods that are made in the current period.

The other huge thing I didn't know was that GDP only counts final goods.  The example Baumol uses is computer chips.  Computer chips are components, not final goods.  So does that mean, a chip manufacturer and distributor like Celestica doesn't contribute to the GDP?  That might be a bad example because I'm not sure if Celestica is American or Canadian.  Baumol uses Intel.  Intel's goods are not considered final, but are intermediate, and so to not double count their sales, they are not included in GDP at all!

The Celestica thing brings up another key point about GDP.  Geographic boundaries are important, but complex.  Any product produced in the U.S. regardless of whether or not it is a foreign company, gets counted in GDP.  Says Baumol "if your family owns a Toyota or a Honda, it was most likely assembeled ina factory here.  All that activity of foregin firms on our soil does count in our GDP." (It would be excluded in GNP however, Gross National Product.)

So I have some questions for the professor:

1)  If companies like China, India, Taiwan, are all producing a ton of foreign goods, does it mean that their GDPs reflect that?

2)  Much of what the above mentioned countries produce are intermediate goods, in other words: parts.  Does that mean they are not counted?

3)  GDP is a governmental statistical measure.  Governments are different.  If the U.S. Government says the GDP of Greece is X billion dollars, and the government of Greece says the GDP is 4X billion dollars, who's right?

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