Value Investing – Gross Domestic Product (Lesson 21)

Gross Domestic Product is defined as the total production for the country. It is measured by including all the dollars spent to purchase products/services from all the various sellers of goods. The largest purchaser of products/services is consumers. Coming in behind consumers are businesses, remember they are buying goods too. This includes everything from office supplies to the raw materials to make the products the consumers ultimately purchase. Finally, the government spends money on materials too. Of course, they purchase items that many of us cannot afford such as aircraft carriers. 

One of the problems with the formula is where the product is manufactured. It turns out the sneaker (Converse All-Star, the old Chuck Taylors, you have to be at least 45 to appreciate them) used to be made in the United States, but it is now made in China and shipped here. In reality, the product is an import. But at the same time, the United States makes products and ships them to other buyers throughout the world. Thus, the Gross Domestic Product formula makes an adjustment for exports and imports. Over the last 30 years or so, the United States imports more than it exports thus the Gross Domestic Product formula is adjusted downward to reflect the net value of the total imports in excess of the exports.

The following sections describe the four main areas of the formula and how the value is derived.

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