Counted or Not?

GDP includes much economic activity but not all of it. As a measure of production, GDP does not include purely financial transactions. When you purchase shares in the stock market, only the broker's commission would be counted in GDP. This is because the purchase of stock represents a transfer of ownership from one shareholder to another, and neither a good nor service is produced. Similarly, transfer payments like Social Security are not computed in GDP. Social Security payments are not made in return for the production of a new good or service but instead represent a transfer from a taxed wage earner to a recipient.

Production for which no financial transaction occurs is also excluded from GDP. A stay-at-home parent who cares for the children, cleans the house, cooks, and runs errands certainly produces something of great value, but because no monetary payment is made, the value is undetermined and excluded. Interestingly, paying someone to do all of the above activities would be included in GDP. Building a deck on your house, mowing your own grass, and changing your own oil are all services that can be purchased, but when you perform them for yourself, they are not included in GDP.

To avoid overstating GDP, resale and intermediate production is excluded. Most home purchases are not counted in GDP. The resale of homes does not represent new production and is excluded. The only time home purchases are included is when the house is newly constructed. The primary reason resale is not counted is to avoid double-counting. Older homes were included in a previous year GDP. Consider the sale of flour, butter, and sugar to a bakery that produces fresh bread. If the purchase of ingredients were included in GDP along with the sale of the fresh bread, the GDP would be overstated. To avoid this, GDP includes only final production of the bread. The price of the bread includes the earlier cost incurred in acquiring the ingredients.

How does GDP account for those who do not rent?

Apartment and house rent is included in consumption, and therefore GDP. Homeowners and mortgage payers do not pay rent, so the BEA imputes a rental payment on their housing. Whether you are an owner or a renter, when it comes to GDP, everyone is a renter.

Illegal production is excluded from GDP because it is difficult to measure. Participants in black market activity have little incentive to provide data for the government to measure production. Underground activity, like babysitting and lawn care, may go unmeasured because of their cash basis and the failure of the average teenager to properly report income. Some estimates place the size of the illegal and underground economy at approximately 8% of official GDP. If that is the case, then official GDP is understated by more than $1 trillion.

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