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One of the textbook ways to calculate GDP is through the factor payments. We sum up the cost of salaries and retained earnings of all firms in the economy (assuming no taxes or international trade).

Consider a firm that operates at a net loss. It produces no products, and its only expense is the CEO's salary which is $1 million dollars per year. It funds this salary expense by taking on debt and venture capital investments.

But this firm seemingly adds $1 million to the annual GDP via its employee salary factor payment even though it doesn't seem to produce anything.

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You are correct in suspecting that this firm produces no added value, but this does not contradict your definitions.

We sum up the cost of salaries and retained earnings of all firms in the economy
[...]
[a firm] produces no products, and its only expense is the CEO's salary which is $1 million dollars per year.

salaries retained earnings sum
$+$ 1 million $-$ 1 million 0 million

EDIT: user161005 pointed out that I did not answer the question in the title. Unprofitable companies can increase GDP. In the above example, if, due to some amount of production, the retained earnings were only −0.5 million dollars, the company would still operate at a loss, but the net (direct) effect on GDP would be positive.

salaries retained earnings sum
$+$ 1 million $-$ 0.5 million 0.5 million

GDP is a problematic measure in many ways. The second example only shows us that GDP is higher if the company exists and employs these people than if the company did not exist and these people were unemployed. This begs the question: Is the labor in this example really "worth" 1 million dollars? (Is this a market value?) If it is, then if the company were to close AND the labor would be reallocated via the job market to other companies earning a similar salary, we would get an increase in GDP.

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  • $\begingroup$ So, the answer to the question in the title is "NO" $\endgroup$
    – user161005
    Jul 8 at 9:45
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    $\begingroup$ @user161005 That is not true. In the above example GDP would increase if the retained earnings were only $- 0.5$ million. $\endgroup$
    – Giskard
    Jul 8 at 10:09
  • $\begingroup$ Why are retaining earning -0.5 million in the second example, instead of -1.5 million, considering that CEO is paid 1 million? $\endgroup$
    – user161005
    Jul 8 at 10:51
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    $\begingroup$ "The firm had expenses due to production, according to you." Where do I write that the firm has any non salary expenses? Perhaps you misunderstood the sentence "due to some amount of production, the retained earnings were only −0.5 million dollars". This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. Or perhaps you are confusing retained earnings with some other category? $\endgroup$
    – Giskard
    Jul 8 at 13:00
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    $\begingroup$ " Where do I write that the firm has any non salary expenses? ... This is possible if the firm had a revenue of 0.5 million and paid the CEO 1 million. " Thanks, now I see how this is possible. Although I find GDP increase kind of counter-intuitive, as negative profits usually indicate wealth destruction. So we can have higher wealth destruction and higher GDP at the same time DUE TO said wealth destruction! $\endgroup$
    – user161005
    Jul 8 at 15:37

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