Gross Domestic Product - Adding Up Everything We Do

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the promo code ekon at checkout. It's time to Think
like an Economist.
This is our first episode on macroeconomics, which is all
about these big concepts about the whole economy. How do
we go from micro to macro?
Well, we've got to move beyond micro decisions about you,
your individual household, are, your individual business, to the macro landscape,
which is the big picture of what's happening across the
whole economy. It's about the whole enchilada, and.
It's a big unchilada, so it's important to develop a
sense of scale about it. Here's one way to help
make the link from the size of your personal economy
to the whole economy. Now, as I asked you early
to grab one hundred dollars, what does it look like.
Well, it's just a small, thin piece of paper, and
if you.
Put one hundred of those together, you'll have ten thousand
dollars in a small bundle. That's about a stick as
a pack of cards.
Right. The average income in america's around sixty five thousand
dollars per person, so the average American earns six and
a half of these bundles. You can hold these in
your hands.
Now if you want a sense of what a million
dollars looks like, well, a million dollars would fill a briefcase.
Like in a crime movie.
That's right. Let's go a step further. A billion dollars
is one thousand million. A thousand briefcases of cash would
basically fill a bus, which means that a billion dollars
is a bus full of Ben Franklin's.
That's fairly a lot of cash, but.
That's still not enough. Macroeconomics is often about trillions of dollars.
If a billion dollars is a bus stuffed with cash,
then a trillion dollars is a thousand buses, which you
could probably fit in a standard football field. So a
trillion dollars is a football stadium stacked with cash to
a bit above your head.
Naz, The total output of the United States economy is
a bit more than twenty trillion dollars a year. So
if you want to think about the total value of
what we produce each year, imagine your favorite football study
with one hundred dollar bills stacked up to the very
highest seats.
And that's how we can think about the size of
the US economy. Our total output of twenty trillion is
what economists call gross domestic product or GDP, and GDP
is the topic of today's episode of Think Like an
Economist with me Betsy Stevenson.
And I'm justin wolf Is. We're going to help you
transform your life using economics, and journalist and former economics
student nezdra and Tebacoli Fower joins us.
So this is the episode where we start getting into
these slightly scary and also fascinating concepts GDP. I think
most of us think of it as being like the
value of everything, But what exactly is GDP?
Gross domestic product is the market value of our final
goods and services produced within an economy in a year.
So you mean, if we add up everything we do
from making high tech computers and medical equipment, to teaching
people at schools, to growing wheat, to selling haircuts, to
making and selling furniture and everything.
Really, yep, that's right. The total value of all these
goods and services we produce in a year adds up
to around twenty trillion in the US. To make this
easier to understand, we tend to divide total output by
the number of people. So currently GDP is around sixty
five thousand per person in the United States.
This is still a big concept, though.
It is, so let's break down the definition a bit more.
Gross domestic product is the market value of all final
goods and services produced within an economy.
In a year. Right at the start, we're saying GDP
is the market value. That's because GDP is literally an
exercising adding apples and oranges. If a farmer produces a
bunch of apples and another producers oranges, we've got to
figure out how to add up these apples and oranges.
We do this by adding up their value measured dollars.
So if apples sell for two dollars a pound, and
orange is a one dollar, then we say that each
pound of apples heads twice as much to GDP as oranges.
According to GDP, then an apple or an orange or
whatever is worth whatever its price takes says it's worth.
The next bit of our definition are the words of
all As we're saying the market value of all final
goods and services.
GDP counts everything that's produced. This includes the price of
all computers that we make, and the price of all
teachers working for a year that's their wage, and the
price of all the wheat of pharma cells and so on.
It even includes the things that government buys for you,
such as healthcare or national defense.
Then the next part of the definition is about all
final goods and services.
Yes, this bit about final goods is a bit tricky.
It means that we're going to count the value of
your Apple laptop that you just bought as part of
GDP because it's a final good and you are the
final user. But we're not going to count the components
that went into that laptop, like hard drives and memory
chips that Apple bought along the way as it was
manufacturing it. That's because the value of each of those
individual components that went into making the laptop i'll go
into the final sale price. So we want to make
sure we're not double counting, so we just becus on
those final goods, which is in this case the laptop,
not the ingredients used to make it.
Okay, back to the definition of GDP, the market value
of all final goods and services produced within an economy
in a year. Next up is the term produced.
That's there because there are a lot of things that
we buy that don't count in GDP. Say you buy
a secondhand car. This may be a new purchase for you,
but there's been no new production because the car already existed.
The value of secondhand goods would have been counted as
GDP back when they were sold the first time, but
not now that they're being resold as secondhand.
That makes sense. We're almost done with our definition of GDP.
Next is within a country.
GDP is about what we're producing domestically. If someone in
the US buys a Toyota car from Japan, that isn't
part of US GDP because the car wasn't produced in
the US.
But I guess Japan include that car in its GDP
figures exactly.
So GDP includes the market value of exports but not imports.
And the final part of the definition is in a year.
GDP is a flow as we're measuring the values of
things being produced in a specific period of time. Think
of it this way. Just as water flowing into a
bath raises the level of the water, the new stuff
we produce each year raises the resources available to us.
GDP measures how much water we're adding to our macroeconomic bath.
To measure this flow, we look at GDP over specific
time periods like a year, or sometimes a shorter period
like a quarter, which is three months, just.
A final point before we move on. So now we've
gone through the definition of GDP. We often hear the
words nominal GDP or real GDP as well.
Yes, nominal GDP adds up the value of all the
apples and oranges and other stuff we produce based on
their current prices. But prices rise over time, a process
we call inflation. We've got an episode of think like
an economist on inflation coming up in a few weeks.
Inflation means that even if we don't change how many
apples or oranges or other stuff we produce, nominal GDP
might still rise if the prices of all these goods rise.
So our nominal GDP figure will rise, but this is
due to inflation, not because we're producing more in the economy.
That's right, So real GDP adjust for inflation and also
lets us make comparisons over time about how much actual
stuff we're producing without inflation clouding things.
So far, we've been talking about how GDP is a
measure of everything we produce. But here's the amazing thing
about GDP. It's also simultaneously a measure of our total spending,
and it also measures the total amount of income that's
earned in the economy.
Okay, break this down a little. So you're saying it
measures total outputs as we're adding up everything we produce,
and we've just looked at that. But you're also saying
that GDP measures total spending.
Yes, basically, everything that gets produced gets sold. Remember that
we value output according to its price tag, so the
total value of what we produce must be equal to
the total amount that people spend.
And to calculate this, we can look at all the
potential buyers of the stuff we produce. When you and
I buy stuff, it's called consumption spending. When businesses spend
money on machines and the like, we call it investment.
And when the government spends money on our behalf. It's
called government spending.
And the final source of spending is that foreigners sometimes
buy our stuff, and we call that exports.
In fact, GDP counts our exports minus our imports. This
gets tricky, but I don't want you to think that
this is because imports subtract from GDP, because they don't.
If you bought a Toyota car that was made in Japan,
that's mechanically counted as part of your consumption spending, but
it should count toward the GDP of Japan rather than America,
which is why we have to subtract imports like that
Toyota from America's GDP.
So we're saying that GDP is also equal to total
spending in an economy in a given year, and total
spending adds up consumption, government spending, spending on investments, and
also exports minus imports. That's right, and to fully understand GDP,
you're also saying that GDP is equal to total income.
It is. Think of it this way. Every dollar I
spend is a dollar of income for someone else, so
total spending is also total income.
I like to think that this makes GDP more relatable.
It's not just the economy's total output or total spending
on what we produce. It's also a measure of our
total income. So next time you hear about what's happening
to GDP, realize that you're learning about what's happening to income.
And that gives us one more way to think about you.
When you divide total GDP by the population, you get
GDP per person. Another way of saying this is that
GDP per person measures everage income.
Our key takeaway here is that GDP is actually three things.
It measures the total output in the economy. It also
measures the total spending in an economy, and it measures
the total income in that economy. This is all cool
and everything, but I'm already imagining some problems, or rather
some things that aren't in GDP, which are probably important.
GDP does have limitations, and it's really important to be
aware of them.
First off, I'm thinking we're focusing on prices as how
much we value something, but there are things we use
a lot and really value that we don't really pay
much money for.
You mean, like my morning coffee. I only pay a
couple dollars for it, but I really need coffee and
they'd be willing to pay a lot more. GDP just
doesn't underst stand my coffee cravings, and it says the
coffee's worth whatever its price is, regardless of how much
I would actually pay for it.
The problem is that GDP ignores you consume a surplus Betsy,
and that can be a really big deal when there's
a lot of stuff that you really value but you
pay nothing for.
We talked with our friend Eric Brynnolfson, who's the director
of the Digital Economy Lab at Stanford University, and he
told us all about this.
Economists look at GDP and productivity, which is based on GDP,
to understand how the economy is doing. But what most
people don't understand is GDP is not a measure of
the value created. It's a measure of the production costs.
And if you really want to know what people value,
you need to look at something like consumer surplus and
producer surplus. The digital economy has a lot of free goods,
a lot of zero price goods like Wikipedia, instant messaging,
email search, social media, and most of those goods don't
show up in GDP because they have zero price. More
and more of the economy digital which means we're getting
more and more free stuff through the Internet and through
our smartphones, and we kind of take it for granted
that this stuff is free, but it's a big chunk
of the economy.
So that's one limitation. I'm also thinking a lot of
people do work that's really valuable, but they're not getting
paid for it. Things like taking care of your kids,
or making your own dinner, or growing a veggie garden.
You know, this is really important output, but because it's
not butt and sold in the market, it isn't counted
as GDP. We shouldn't ignore those efforts when we're evaluating
the economy. But unfortunately GDP does exactly that. And because
a lot of this uncompensated work is done by women,
feminist economists like me have argued it's a major shortcoming
of GDP.
And are there other important goods or services that are
missing from our GDP figures?
Yep, there's lots of dodgy activities that occur in the
shadows and that are never reported to the government. Your
local drug deal is probably not reported their annual revenues,
and businesses trying to dodge taxes under report their sales
and that's sixty dollars in cash I paid my babysit
a last week won't end up being recorded if he
doesn't report the income to the government either.
We call these activities the shadow economy, and it could
be pretty big. Economists have estimated how much bigger GDP
would be if we could count the shadow economy. They
run surveys, analyze audits, and track things like how many
hundred dollars bills are in circulation because they're often used
by drug dealers and other illicit activity. In the United States,
the shadow economy would probably add another eight percent to
the official GDP numbers, while in Italy it's estimated to
be worth a whopping twenty three percent of their GDP.
The way we miss a GDP also undervalues the environment.
When Apple makes a laptop, someone has to mine the
rare earth metals needed to make the silicon chips, and
it burns fossil fuels to power its factories, less to
chop down trees for the boxes that sells them in.
All of this sounds pretty destructive, but our GDP calculations
value all of this as if it were positive.
Yeah, so, what about the fact that mining creates pollution.
Cutting down trees kills an essential source of oxygen, and
burning fossil fuels destroys the atmosphere.
None of this is counted. Instead, GDP sees that Apple
created a laptop, which accounts as a good thing, and
it doesn't take into account the cost of how this
production also degrades the environment. It's like a tree has
no value until it's chopped down and used to make
something else.
Another problem with GDP is that it's so focused on
production that it doesn't count leisure.
And why does this matter?
Well, if you work more, you're being paid more and
you're producing more, but you're also not resting as much,
getting to see friends and family, or even just reading
a good book. There may be no dollar value on
those things, but we benefit from that gush.
Yes, And there's one more problem. That's GDP is designed
to measure the total amount of output, spending, or income.
It's the total size of the pie. But I think
inequality is really important. The problem with macroeconomic measures like
GDP is that by focusing only on the size of
the pie, they totally ignore this. It's like GDP counts
an extra dollar as being just as valuable if it
goes to Bill Gates as if it goes to a
single mother.
Often we hear GDP being used to describe how well
people are doing, as though GDP tells us something about
living standards, and dare I say it well being? And
we talk about higher GDP as meaning a better life. Now,
is this accurate?
It's a bit like the age old question of can
money really bias happiness exactly?
And you're both the world's experts in these various studies.
You probably want me to say that money doesn't have
anything at all to do with how well we're living.
But Betty and I have studied the numbers and they
show others.
We've analyzed surveys which ask millions of people around the
world how happy they are, and we find that life
satisfaction is hiring countries which have higher GDP per person.
We don't know precisely why this is, but we do
know that when GDP is higher in a country, it's
likely that people are living better day to day. They
can afford better food, and they can afford appliances that
can help their day to day. They have access to
education and healthcare and other things that can really improve
their lives.
GDP essentially measures the resources in an economy, and our
data shows that if you have more resources, you're likely
to be living better, and that includes being happier.
Our data even shows that more GDP is related to
people smiling and laughing more. Not just that if you
live in a country with high GDP, you're also less
likely to suffer pain, you'll get more education, live longer
on average, and you'll be less likely to lose a
child when they're an infant. In countries with higher GDPs
also tend to give their citizens more rights.
It really does seem like, even though there are a
bunch of issues with GDP, ultimately it does a pretty
good job of measuring our quality of life.
Betsy justin today's episode was our first big adventure into macroeconomics.
How would you summarize all of this?
The big idea is that we measure the size of
an economy in terms of gross domestic product or GDP.
You could say there's three big ideas here, because gross
domestic product is a measure first of our total production. Second,
it's a measure of our total spending, and third it's
a measure of our total income.
The thing that really helped me most is to understand
that GDP per person is a measure of the average
income per person. I can see both the weakness in this,
which is that other things matter, and the strength, which
is that greater income and greater resources probably are related
to our level of material well being.
So my homework for our listeners over the next few
days is to think about how each of your active
these are reflected in GDP. Is the coffee you make
in the morning counted? Would it count differently if you
bought it from a cafe if you bought it from
a cafe, Would it count as much as you value it?
Is your work counted? What about your days off? Do
these different activities get enough emphasis? And what all those
numbers reflect your well being?
They're big questions, Betty, but they're also very personal questions,
and that's a key idea I want our listeners to
keep in mind as we continue to explore macroeconomics, how
each of outlived experiences show up in these big macroeconomic numbers.
These are questions that are going to be worth bearing
in mind over the next few weeks as we continue
to dig into the big issues of macroeconomics.
And a as. So, now we're ready for my favorite
economist dad joke of all time. Ready, yep? What the plumbers,
trash collectors, and economists all have in common?
I don't know. Justin what do they in common?
They all deal with gross domestic product?
Justin that's terrible.
Oh come on, I bet our listeners recognize My dad
joke is three things. It's gross, it's domestic, and it's
my product. So my joke about gross domestic product is
now part of our gross domestic product.
Thanks for listening.
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