4
$\begingroup$

My book says the way we calculate real GDP in a given year is by adding the quantities of all goods and services produced in that year multiplied by their prices in some base year. There are actually two things I can't quite get:

  1. How do we account for goods and services that exist now but weren't around in the base year? I mean, especially today, with things such as the market for apps, startups, and the increasing number of new products that get released on an almost daily basis, wouldn't the real GPD calculated that way become dated really fast?

  2. This might turn out to be a really silly question, but how do we take into account quantities of services that are provided in a given year, such as lawyer services, marketing services etc.? All examples I've seen of calculating real GDP were of the sort "consider an economy that produces only apples an orange...".

Thanks very much in advance.

$\endgroup$
4
$\begingroup$

First, note that GDP is not the quantities of all goods and services produced in that year multiplied by their prices in some base year, but the quantities of all final goods and services produced in that year multiplied by their prices. Intermediate goods and services are not included.

1) GDP is about value created in the economy. So, if there are new services or products, we should simply include them. For the price, we take the price in that year and deflate it using a factor that accounts for inflation. Note also that new services and products typically come at the expense of other products produced. People that would otherwise be, say, working at a factory, are now programming apps.

2) As you would with oranges and apples. Lawyers typically charge a price per hour. So, it would be number of hours times the price. For more general services, like, say, the police force, you would just calculate the costs of the police force for a given year.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.