The gross domestic product (GDP) is the total market value of final goods and services produced domestically during a specific period, usually 1 year. Final goods are those purchased for final use rather than for resale or further processing. In contrast, intermediate goods are those purchased for resale or for use in producing another good or service.
GDP Measures Current Final Domestic Production
GDP is a “flow” variable: it measures the market value of production that flows through the economy. GDP counts only the production during the current period. Thus, sales of used goods are not counted by GDP. However, sales commissions count toward GDP because they involve services provided during the period.
GDP counts only final goods and services. Sales at intermediate stages are not counted by GDP because the value of the intermediate goods has been included in the final good. Example: A farmer sells some vegetables (the intermediate good) to a restaurant for $1. The restaurant then makes a vegetable salad (the included in GDP. Final good) and sells it to you for $5. Only the $5 from the salad is included in GDP.
GDP counts only goods and services produced domestically, whether by citizens or foreigners. GDP counts only production of goods and services. All financial transactions and income transfers are excluded because they represent exchanges , not production, of goods and services.
GNP vs. GDP
Gross national product (GNP) is the total market value of all final goods and services produced by the citizens of a country, regardless of whether the output is produced domestically or abroad. In contrast, GDP is the total market value of final goods produced within a country, regardless of the citizenship of the producers. In short, GNP measures the worldwide output of a nation’s citizens, while GDP measures the domestic output of the nation. If the overwhelming bulk of output is produced domestically with resources owned by the citizens of a country, the difference between the
GDP and GNP is usually small. If the country has attracted a relatively large number of foreign workers or a large amount of foreign investment, the country’s GDP will exceed its GNP. If a relatively large number of a country’s citizens work abroad, or its citizens have made substantial investments abroad, the country’s GNP will exceed its GDP.