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Gross domestic product (GDP)
Published on September 30, 2015 18 min
Hello. My name is Ivan Cohen. I'm an associate professor in finance and economics at Richmond University, The American International University in London. And this little talk is about GDP, Gross Domestic Product.
During the business cycle, the key element, which is going up and down, is of course, macroeconomic output or production. We usually measure macroeconomic output by a statistic called gross domestic product, and of course, we've become such a sophisticated society that news readers and newspapers take it for granted that ordinary people understand what is gross domestic product or GDP. Very simply, GDP is best defined by the P, product or production. Gross domestic product measures the output generated through production which is physically located within the confines of a country. So any production that occurs within the national borders of a country contributes to its gross domestic product. It therefore excludes income earned by citizens working overseas. And we know that many countries these days have a diaspora of people who tend to work overseas and send money home to their families at home, such moneys are not included within GDP. GDP includes the rental value of owner-occupied housing. That is to say, when a house is built, we don't assume the entire value of the house as part of GDP. Rather, we look at the value of the services that house is likely to provide over a number of years in terms of its equivalent rental value. The important thing about GDP is because it's measured in the same way in different countries, it enables us to make good comparisons between countries. And it has become the standard used in international guidelines for economic accounting. If you learn, no other macroeconomic statistic, you should know what GDP is. It really is the statistic which gives us the best measure of how well economies are doing, but it is not flawless. Before I get to look at what makes the flaws in GDP, let's have a quick look at the key determinants of GDP.