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# The meaning of the GDP

Discussion in 'Economics' started by Shallot, Jun 10, 2009.

1. ### Shallot

I'm having some trouble wrapping my mind around the meaning of the GDP. Real GDP is just the nominal GDP divided by some index that tracks changes in prices, right? So if the CPI in base year is 1, and the CPI this year is 2, then real GDP this year is nominal GDP this year/2, correct? And nominal GDP is just the prices of everything sold * the quantity sold, right?

That's the technical definition, but I don't quite grasp the meaning of it in practice. Two scenarios:

1) For instance, suppose last year the price of an apple was \$1. And let's just suppose this year it remains \$1. If I then buy an apple from you for \$1, and sell it back to you for the same \$1, and we do this 100 times, we've just added \$200 to the nominal (and real--if indexed to last year) GDPs, correct?

But in practice, nothing has actually improved. Indeed, arguably we have wasted our lives on a series of stupid transactions. That should in any scheme of things be a net loss to society! Yet the statistics don't account for this.

How does that make any sense?

2) Last year diamonds cost \$1000 because they were scarce and bread cost \$1 because it was common. 1 diamond and 1000 pieces of bread were sold. Nominal GDP last year = \$2000

This year, diamonds are common, now costing \$1, and bread is scarcer, now costing \$2. Let's say 100 diamonds and 800 pieces of bread were sold. Nominal GDP = \$1700, but real GDP indexed to last year is \$100,800!

But haven't things arguably become worse, with the cost of staple foods having doubled? Are people really getting more value out of a situation with cheap diamonds and expensive food than the reverse?

What am I missing here? What statistic would reveal the underlying logic of these situations better? Can anyone recommend any articles or books that would show how economists would understand this stuff?

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