Business Principles

The chief measure of a nation’s economic wealth is the gross domestic product (GDP). The GDP is the total market value of all goods and services produced in a country in a year. Whenever products or services are purchased, the total dollar amount is reported to the federal government. The GDP of the United States is
compared from year to year and is also compared with the GDP of other countries. These comparisons provide an ongoing measure of economic success.

Certain types of transactions, however, are never included in the GDP. These transactions are not recorded because they are unlawful or do not occur as part of normal business operations. For example, when a student is hired by a homeowner to mow lawns, formal business records are not normally prepared and the
income is usually unrecorded. Some adults work part- or full-time for cash and never report that income or pay taxes on it. When drugs or counterfeit merchandise are sold illegally, such transactions are of course unreported. Income that escapes being recorded in the GDP is referred to as the underground economy.

Business transactions that occur in the underground economy have increased in recent years in relation to the total GDP. Estimates range between 5 percent of the GDP during a brisk economy to 20 percent during a slow economy. The size of the underground economy concerns government officials due to its illegal nature and because the activities are not taxed although the people involved still require government services.

In 2005, the total known and recorded GDP for the United States reached the staggering $12.4 trillion mark, as shown in Figure 1-2. As a comparison, the GDP of the United States is slightly more than the combined total GDP of the 25 countries that make up the European Union (EU). The only single country that comes close to America in terms of GDP is China. That country’s rapidly growing economy produces a GDP now totaling over $8 trillion. The rate of growth and the current size of the U.S. GDP indicate, in a rather striking way, its economic strength.