Economics / Unit 8: Measuring the Economy: GDP, Unemployment and Inflation
8.1 Gross Domestic Product
Notes
Gross domestic product (GDP) is the total market value of all final goods and services produced within a country's borders in a given period, usually a year or a quarter. It is the main measure of an economy's size.
- Final goods are sold to their end users. Intermediate goods (flour sold to a bakery) are not counted separately, to avoid double counting; their value is included in the final good.
- Not counted: used goods, purely financial transactions (buying stocks), transfer payments (Social Security checks), unpaid household work and illegal or unreported activity (the underground economy).
- A car made by a Japanese company in a U.S. factory counts in U.S. GDP. Production by U.S. firms abroad counts in other countries' GDP.
- Expenditure approach: $GDP = C + I + G + NX$, where $C$ is consumer spending, $I$ is business investment (equipment, buildings, new homes, inventories), $G$ is government purchases and $NX$ is net exports (exports minus imports).
- Consumer spending is by far the largest part of U.S. GDP.
- Worked example: $C = 14$, $I = 4$, $G = 3.5$, exports $= 2.5$ and imports $= 3$ (all in trillions of dollars). $GDP = 14 + 4 + 3.5 + (2.5 - 3) = 21$, or $21 trillion.
Practice
Which purchase is counted in this year's U.S. GDP?
GDP counts newly produced final goods and services. Used goods, stocks and transfer payments are excluded.
An economy has consumer spending of $600 billion, investment of $150 billion, government purchases of $200 billion, exports of $80 billion and imports of $100 billion. What is GDP?
$600 + 150 + 200 + (80 - 100) = 930$.
Why is the steel sold to a car company not counted separately in GDP?
Counting both the steel and the car would count the steel twice.
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