Gross Domestic Product (or GDP) is the value of all finished or final goods and services produced domestically in a year. I pull apart the definition in this post.
Hi Nikki. A few things: a. Congratulations on your book deal! So exciting. b. On GDP, there is always been a nuance that has bothered me, but I haven't resolved it. Specifically, let's say Ford makes an F150 truck and sells it for $80k. Assume the cost of goods sold to make the truck is $50k. Further, assume those numbers (sales and COGS) are identical two years in a row. In year X - all of the $50k was purchased from domestic companies. and year X+1: none of the $50k was purchased from domestic companies (all international purchases). How would this change manifest itself in our GDP?
Good question! Year 1 is easy. COGS goes into inventories, a part of Investment. I haven’t shared that post yet. Soon!
In year 2, the sales “costs” go into Consumption, unless its a fleet vehicle, then it goes into Investment for the purchasing company. The COGS is added as inventories, then subtracted as Imports.
I promise to get into all of this in the next two weeks!
The addition to GDP would be smaller in year 2. This, in and of itself, is not a reason to stop importing. Car manufacturers are drawing upon an economic concept called advantage. Parts manufacturers in other countries may be able to produce more for less—theoretically reducing the price of cars. We saw what happens when a part is stalled during the lockdowns. In that case it was microprocessors. Industry production fell by 7.2 billion units.
* The hair product is an intermediate good that gets used up so it would appear in the value added method for GDP but probably not in this expenditure example. (Like flour in bread, I think.)
* The hair dryer is produced outside the US so it doesn't count in US GDP. In terms of spending categories, it shows up as investment spending and as spending on imports so there is no effect on US GDP.
Thank you for the close reading. I knew the hair product was problematic! And yes, the hair dryer is an important, so in the GDP equation, it is subtracted.
This was a great explanation! I am impressed with the research and thought that went into this. I’ll never think of gdp the same 😁
Glad to hear this!
Hi Nikki. A few things: a. Congratulations on your book deal! So exciting. b. On GDP, there is always been a nuance that has bothered me, but I haven't resolved it. Specifically, let's say Ford makes an F150 truck and sells it for $80k. Assume the cost of goods sold to make the truck is $50k. Further, assume those numbers (sales and COGS) are identical two years in a row. In year X - all of the $50k was purchased from domestic companies. and year X+1: none of the $50k was purchased from domestic companies (all international purchases). How would this change manifest itself in our GDP?
Good question! Year 1 is easy. COGS goes into inventories, a part of Investment. I haven’t shared that post yet. Soon!
In year 2, the sales “costs” go into Consumption, unless its a fleet vehicle, then it goes into Investment for the purchasing company. The COGS is added as inventories, then subtracted as Imports.
I promise to get into all of this in the next two weeks!
If the total number of vehicles sold is the same in both years, does GDP change?
The addition to GDP would be smaller in year 2. This, in and of itself, is not a reason to stop importing. Car manufacturers are drawing upon an economic concept called advantage. Parts manufacturers in other countries may be able to produce more for less—theoretically reducing the price of cars. We saw what happens when a part is stalled during the lockdowns. In that case it was microprocessors. Industry production fell by 7.2 billion units.
Hi,
Nice explanation! A couple of points:
* The hair product is an intermediate good that gets used up so it would appear in the value added method for GDP but probably not in this expenditure example. (Like flour in bread, I think.)
* The hair dryer is produced outside the US so it doesn't count in US GDP. In terms of spending categories, it shows up as investment spending and as spending on imports so there is no effect on US GDP.
Thank you for the close reading. I knew the hair product was problematic! And yes, the hair dryer is an important, so in the GDP equation, it is subtracted.
Is an import. Sorry all.