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The most widespread measurement of national economic growth is gross domestic product, or GDP. The U.S. government collects and compiles economic data through the Bureau of Labor Statistics, or BLS. Once the data is organized, it is used by the Bureau of Economic Analysis, or BEA, which is part of the Department of Commerce, to estimate the GDP and the national income. GDP is used by the White House and Congress to prepare the federal budget. It is also used by the Federal Reserve for monetary policy. Even economists who understand the statistical limitations of GDP still rely on it as a proxy for economic growth.

What Is GDP?

Economic performance and growth are difficult to measure. The economy is simply too complex and too uncertain to really understand how much larger or stronger it is at the current time than it was a year prior. Statisticians and economists compensate for this by using total expenditures as a proxy for total productive output.

This is where gross domestic product comes in; GDP keeps track of the money value of all final goods and services produced in the United States for a set period of time. To see how this works, consider a simplified economy with only two goods: steel and wheat. Suppose that in 2013, the summed money value of all wheat products was $40 million and the summed money value of all steel products was $100 million. The 2013 GDP of this simple economy was $140 million.

Now suppose that wheat production doubled but steel production remained constant in 2014. The GDP for 2014 would be $180 million, or $80 million plus $100 million. Economic growth from 2013 to 2014, in terms of GDP, is roughly 28%.

GDP Measures Production, Not Sales

According to the BEA, the measure of output is based on goods produced instead of goods sold. If a new television is produced in 2014 and sold in 2015, its productive value counts towards 2014 GDP. The television is reported in current inventories on the producer's financial statements. If the consumer resells the television later in 2015, GDP is not affected. This is because no new production actually took place.

GDP Tracks Final Goods, Not Capital Goods

Economists differentiate between intermediate goods and final goods. Final goods are also known as consumer goods. A consumer good is an item not designed for use in the stages of production for another good. This is done to prevent double or triple-counting of a good.

Consider an orange. Is it a consumer good or a capital, or rather, intermediate good? That depends on who purchases the orange and for what purpose. If a grocery shopper purchases the orange and eats it, the orange is a consumer good. If instead a juice-maker purchases the orange, lists it in his inventory and uses it to sell juice, the orange is a capital good. Either way, only one orange was produced and only the final sale of that orange counts towards GDP.

Nominal GDP and Real GDP

The government publishes real and nominal GDP figures. Real GDP is more reliable, because it discounts current GDP figures using the rate of inflation. Otherwise, a decline in the value of money could raise GDP without any extra economic production.

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