No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 452 attention to the italicized terms: gross domestic product is equal to the market value of all final goods and services produced within a country in a given period of time. GDP only considers goods that are traded on markets, which excludes much economic activity in a country. For example, all work done in household production (keeping up the home, cooking, maintenance, etc.) is not considered part of GDP if performed by a household member. Yet when the same functions are hired out, those services rendered will be part of GDP. If you go to Jiffy Lube for an oil change, it is counted in GDP, whereas if you buy the oil and filter at Walmart, only the cost of the oil and filter (not your labor) is included in GDP. The other important point is that the market determines the value of the goods and services, which represents the social imputation of value of the good or service. We discussed above that GDP only considers final goods and services produced, so that we may avoid double counting. Yet we also need to realize GDP only captures goods and services , since they are traded in markets. There are many, many things that we highly value in our country, but they are not captured in GDP. For example, we value things like the health of our churches and marriages, the quality of our civic discourse, and the joy of our children; yet none of these are included. Watch this important critique from Robert F Kennedy on the previous statistic used (Gross National Product) to capture this concern: Robert F. Kennedy Challenges Gross Domestic Product This suggests that GDP is not the be-all-end-all measure of our country’s performance. Rather GDP is what it is—simply a statistic that attempts to describe the size and composition of economic activity. Since we’re concerned about economic activity within a country , GDP only captures those goods and services produced domestically and must subtract out any imports from total spending. So a Honda built in Ohio is part Consumption 68% $10.97T Government 18% $2.9T Net Exports -3% -$4.5T Investment 17% $2.7T 2014 RGDP $16.085T Figure 18.4, 2014 Real (inflation adjusted) Gross Domestic Product. Because GDP is a measure of final goods and services, consumption is dramatically larger than other categories, measuring over 68% of our total GDP. Investment and Government are roughly equal, while Net Exports is negative, indicating we have more imports than exports, i.e., we run a trade deficit.