Explain the Basics of Gross Domestic Product and No Double-Counting below using economic terminology, economic logic, and economic reasoning

1)The Basics of Gross Domestic Product

The BEA is charged with estimating output of the U.S. economy. The gross domestic product or GDP is the dollar value of the total output of the economy in a year. Collectively, all the statistics that feed into this process of estimating GDP are known as the system of national accounts (The BEA also estimates quarterly GDP, which is economic output in each quarter of the year.)

Measuring the output of the largest economy in the world is a complicated task. GDP includes a wide range of goods and serviceswe'll explain next which ones belong and which ones don't. For now, think of that range as a long list going from automobiles and light trucks (17.5 million sold in 2018) to baseball games (70 million fans attending in 2018), to college classes (an estimated 19.2 million students enrolled in higher education in 2016), to military strategy (891 generals and admirals in the U.S. armed forces as of the end of 2018), to haircuts (19,000 barbers and 352,000 hairdressers, hairstylists, and cosmetologists hard at work cutting hair in 2017), to paintball (an estimated 3.4 million people participated in 2017).No one really knows just how many different items this list contains, but it's certainly well into the millions for the United States, depending on how finely we cut it.

Such a list, even if we could compile it, would be interesting but not terribly useful. The different types of goods and services are all measured in different units. What have automobiles to do with admirals besides beginning with the same letter? Not much. And there's no easy way to add them all up.

But here's the key: If we can express each item on the output list as a dollar amount, the statisticians at the BEA can sum them into a figure for the total production of the economy.For example, in 2018, U.S. households spent $115 billion on pets, pet products, and related services such as veterinary care. We can add that to the billions spent for haircuts, the total amount spent on knee replacements, and the revenues collected by zoos and aquariums. After we have added our entire list of products and services, we have the output of the economy!

The Components of GDP

What goes into GDP? Here are its components:

Personal consumption: goods and services for household use.

Nonresidential investment: the long-lived buildings, equipment, and software that businesses purchase to use in production.

Residential investment: the construction of new homes and the renovation of existing homes.

Change in private inventories: goods produced by businesses that are not immediately purchased.

Government consumption and investment: goods and services purchased by the government.

Net exports: the difference between exports and imports.

Each of these amounts is measured in dollars, and gross domestic product consists of the sum of all of these:

GDP (in dollars) = Personal consumption + Nonresidential investment + Residential investment + Change in private inventories + Government consumption and investment + Net exports

2) No Double-Counting

We've listed the main components of GDP, but we seem to have left out some economic activity. For example, no category of GDP corresponds to, say, the spending by a business on janitorial services or electricity. In fact, all the intermediate inputs of businesses (described in Chapter 4) appear to be left out.

There's a reason for that. To eliminate double-counting, BEA statisticians count only the purchases of final goods and servicesthat is, goods and services that are bought by their ultimate users. Purchases of intermediate inputs are left out of GDP. Intermediate inputs include any goods and services bought by a business that are completely used up in production in less than a year.

Why do statisticians leave out intermediate inputs? Think about a restaurant that buys apples to make apple pie, which it then serves to customers. The apples are an intermediate input, and the apple pie is part of personal consumption expenditures. We don't want GDP to include both the apples and the apple pie because that would count the apples twice. Similarly, a printing company uses paper and ink to produce a book for sale to readerssay, a textbook. To avoid double-counting, only the purchase price of the book is counted as part of GDP.

However, a business can make some purchases that are included as part of GDP, like nonresidential investments in buildings, equipment, and software. What makes these different is that they are long-livedthat is, they don't get used up within a year. When the printing company buys a printing presswhich may have a useful lifetime of 10 yearsthat's counted as a nonresidential investment. Similarly, the purchase of a commercial oven by the restaurant to bake the apple pies is a nonresidential investment and is included in GDP.

HOW IT WORKS: A TRILLION HERE, A TRILLION THERE...

The total GDP of the United States in 2018 was roughly $20.5 trillion. None of us sees a trillion of anything in our daily lives, so it's hard to get our heads around a number that big. With that in mind, let's figure out how big it really is.

The thickness of a $1 bill is roughly .0043 inch. If we stacked up20.5trillion dollar bills, they would make a pile more than a million miles high. That's more than four times the distance to the moon.

By contrast, if you make $50,000 per year, those dollar bills piled up would be 18 feet highnot nearly as impressive.