GDP is a conservative estimate of national production. Explain why this statement is true.

Question

Quizplus · Accepted Answer

The Answer is Gross Domestic Product (GDP) is the market value of all final goods and services a country produces in a year. In other words, GDP is total output, measured in the country's currency, with each good or service valued at its current market price. Not every market transaction is included in GDP. First, in our definition of GDP, "final goods and services" means that we count the value of goods and services sold only to end-users. By counting only the final value of the product, we capture the value added by all of the inputs embodied in the good or service. Second, the calculation of GDP includes only reported market transactions. If a good or service is produced but not sold in the market, it is excluded from GDP. This means that GDP inherently undercounts the total production of goods and services in any economy. Third, activities that are not reported for whatever reason (e.g., tax evasion, illegal earnings) are also not included in the calculation of GDP. As a result of these exclusions, a country's GDP is understated and provides a conservative estimate of the country's total economic activity.

GDP Is a Conservative Estimate of National Production