GDP measurement & national accounting

Circular flow diagram

Model of flows of resources and money between households and firms.

GDP

Market value of all final goods and services produced within a country in a given period.

Market value

Using prices as weights to add unlike goods/services.

Final vs intermediate goods

Final goods count in GDP; intermediate inputs do not (to avoid double counting).

Value added

Sales minus intermediate inputs (a stage’s contribution to output).

Expenditure identity

Y = C + I + G + NX.

Consumption (C)

Household spending on final goods and services.

Investment (I) (macro)

Purchases of new capital (including housing and inventories) that raise productive capacity.

Government purchases (G)

Government spending on goods/services (excludes transfers).

Net exports (NX)

Exports − imports.

Transfer payments

Government payments that redistribute income; not payment for goods/services.

Inventories (as investment)

Unsold goods produced this period; counted because production happened.

Nominal vs real GDP

Nominal uses current prices; real uses constant prices to measure quantities.

Nominal vs real variables

Nominal measured in current dollars; real adjusted for inflation.

GDP deflator

(Nominal GDP / Real GDP) × 100.

Base year

Index reference year set to 100.

Chained dollars

Real series using changing weights over time to avoid base-year distortion.

Shadow economy

Activity hidden from authorities/statistics (e.g., unreported cash work).

Non-market production

Valuable output not bought/sold in markets (e.g., household work) so excluded from GDP.

Rule of 70

Years to double ≈ 70 ÷ (growth rate in percent)