GDP

One number stands in for an entire economy. It is the market value of production inside a border over a period - a flow, not a pile. Knowing what the border and the period exclude is most of reading it correctly.

Inside the border, inside the period

GDP is the market value of everything produced inside a country's borders during a period. A quarter is the usual period; a year is the usual comparison. The border decides where, not who: a plant standing on domestic soil counts even if a foreign company owns it, while a domestic company's plant abroad does not.

What the number excludes

Only market transactions are counted. Unpaid work - caring for a child, running a household - is production with no price attached, so it never enters. Intermediate goods are netted out at the final sale, so the flour is not counted separately from the loaf. Transfer payments are excluded as well, because moving money to a pensioner is not production.

That rule answers most bad headlines. Selling a used car, trading a share and paying a pension all move money without adding output, because nothing new was produced inside the period. A story that treats those flows as growth is counting turnover, not output.

A rate, not a pile

GDP is measured over a period, so it is a flow: a rate of production per quarter or per year. The factories, roads and software that exist at a moment are a stock, and the stock is not this number. That is the stock vs flow distinction, and mixing the two is the commonest error in macro writing.

One checkable use: before accepting any growth claim, ask whether the figure is real or nominal, and which component moved. If spending rose 5% while prices rose 5%, output did not move at all. The arithmetic is real vs nominal, and checking it is the first thing to do.

Related: Output Gap · Real vs Nominal · Stock vs Flow

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