Ch.9 (Part I) Comprehensive Guide to GDP: Measurement, Components, and Key Concepts in Macroeconomics

Gross Domestic Product (GDP)

The current market value of all final goods and services produced within a country's borders in one year.

Income ≡ Output

They are equal because every dollar of spending becomes income for someone.

Value Creation

Free markets create wealth by producing goods and services people value.

Wealth (Stock)

Accumulated past value, like a lake.

Income (Flow)

New value created over time, like a river.

Market Price

Goods are valued at market price, not total social gain.

Final Goods

Sold to final users (e.g., a pizza sold to a customer).

Intermediate Goods

Used to make other goods (e.g., flour used to make pizza).

Illegal Underground Goods

No records.

Legal Underground Goods

No records.

Homemade Goods/Services

No market transaction.

Used Goods

Already counted when first sold.

Financial Transactions

Either used goods or used to buy capital (counted once).

Government Transfer Payments

Not payment for goods/services.

Leisure Value

Hard to measure.

Bads

Not subtracted from GDP.

Example of GDP Counting

If 4 pizzas sell for $2.50 each → total market value = $10.00.

Double Counting

If we counted both final and intermediate goods, it would be double counting.

Social Gain

The difference between the market price and the cost to produce a good.

Example of GDP Exclusion

Hiring more police due to rising crime does not increase GDP overall.

Expenditure Approach

Adds up all spending on final goods and services: GDP = C + I + G + (X - M)

Consumption (C)

Spending by consumers on durable, nondurable goods, and services

Investment (I)

Spending by businesses on capital, inventories, new housing

Government Purchases (G)

Spending by all levels of government on goods and services

Net Exports (X-M)

Exports minus imports

Percentages of U.S. GDP: Consumption

~70%

Percentages of U.S. GDP: Investment 2

~17% 2

Percentages of U.S. GDP: Government Spending

~17%

Percentages of U.S. GDP: Net Exports

-2.9%

Income Approach

Adds up all incomes generated by production: Wages + Interest + Rents + Profits

GDP per capita

GDP ÷ population = better measure of how well-off individuals are

Final goods vs. inventories

Final goods are sold to end users, while inventories are not counted until sold

GDP Formula

GDP = C + I + G + (X - M)

GDP Identity

Income ≡ Output

Final good

Sold to end user

Intermediate good

Used to make other goods → not counted separately

What GDP Excludes

Illegal/underground economy, Used goods, Financial transactions, Transfer payments, Leisure, "Bads" (pollution, crime, etc.)

New car purchase

Counts in GDP as a final good

Used car resale

Does not count in GDP as it is already counted

Car dealer's commission

Counts in GDP as a new service

Stocks/bonds purchase

Does not count in GDP as it is a financial asset, not a good/service

New home construction

Counts in GDP as investment

Home resale 2

Does not count in GDP as it is already counted 2

Social Security payment

Does not count in GDP as it is a transfer payment

Police officer salary

Counts in GDP as government spending

Homemade dinner

Does not count in GDP as it is not market-based

Review Tip

When in doubt, ask: "Was something newly produced this year and sold in a market?" If yes → Count it in GDP. If no → Don't count it.