Measuring economic activity.

The Gross Domestic Product is an economic indicator that helps us evaluate the size of an economy and its growth over time. It also provides an estimate for the standard of living and the average income in a country with the Gross Domestic Product per Capita (per person). The measurement of GDP involves counting up the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services produced in the current year—and summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total.

Each of the market transactions that enter into GDP must involve both a buyer and a seller. The GDP of an economy can be measured either by the total dollar value of what is purchased in the economy, or by the total dollar value of what is produced.

What is counted in Gross Domestic Product

To be counted in the Gross Domestic Products, goods and services have to follow the 4 requirements below:

Included	Not Included
1-Final goods and services:  A final good or service is purchased by the final user Computer = Final Product	Intermediary goods:  Used to produce final goods.  If intermediary goods were included in GDP they would be counted twice, as they are reflected in the price or market value of the final product. Computer parts = intermediary goods
2-Produced goods and services	Non-production transactions:  Monetary transfers or gifts and Transfer payments, such as payment by the government to individuals, are not included, because they do not represent production.  monetary transfers or gifts.
3-Produced domestically:  The goods or services have to be produced in the US, by whom does not matter.	Imports
4-Produced in a given year	Resale:  The sales of used goods are not included because they were produced in a previous year and are part of that year’s GDP.

GDP Measured by Expenditures

Who buys all of this production? The Expenditures can be divided into four main parts:

First Quarter 2017	First Quarter 2017
Bureau of Economic Analysis – https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=6
Consumption is the largest component of GDP with 65% in the first quarter of 2017 and the most stable. Gross Private Investment is the most volatile and about 16%, similar to Government Spending.  Net Export is negative.

Understanding how to measure GDP is important for analyzing connections in the macro economy and for thinking about macroeconomic policy tools.

HOW DO STATISTICIANS MEASURE GDP?

Government economists at the Bureau of Economic Analysis (BEA), within the U.S. Department of Commerce, piece together estimates of GDP from a variety of sources.

Once every five years, in the second and seventh year of each decade, the Bureau of the Census carries out a detailed census of businesses throughout the United States. In between, the Census Bureau carries out a monthly survey of retail sales. These figures are adjusted with foreign trade data to account for exports that are produced in the United States and sold abroad and for imports that are produced abroad and sold here. Once every ten years, the Census Bureau conducts a comprehensive survey of housing and residential finance. Together, these sources provide the main basis for figuring out what is produced for consumers.

For investment, the Census Bureau carries out a monthly survey of construction and an annual survey of expenditures on physical capital equipment.

For what is purchased by the federal government, the statisticians rely on the U.S. Department of the Treasury. An annual Census of Governments gathers information on state and local governments. Because a lot of government spending at all levels involves hiring people to provide services, a large portion of government spending is also tracked through payroll records collected by state governments and by the Social Security Administration.

With regard to foreign trade, the Census Bureau compiles a monthly record of all import and export documents. Additional surveys cover transportation and travel, and adjustment is made for financial services that are produced in the United States for foreign customers.

Many other sources contribute to the estimates of GDP. Information on energy comes from the U.S. Department of Transportation and Department of Energy. Information on healthcare is collected by the Agency for Health Care Research and Quality. Surveys of landlords find out about rental income. The Department of Agriculture collects statistics on farming.

All of these bits and pieces of information arrive in different forms, at different time intervals. The BEA melds them together to produce estimates of GDP on a quarterly basis (every three months). These numbers are then “annualized” by multiplying by four. As more information comes in, these estimates are updated and revised. The “advance” estimate of GDP for a certain quarter is released one month after a quarter. The “preliminary” estimate comes out one month after that. The “final” estimate is published one month later, but it is not actually final. In July, roughly updated estimates for the previous calendar year are released. Then, once every five years, after the results of the latest detailed five-year business census have been processed, the BEA revises all of the past estimates of GDP according to the newest methods and data, going all the way back to 1929.