Measuring National Output and Growth: GDP in AP Macroeconomics

Circular flow model

A simplified picture of how resources and money move through the economy between households and firms through markets.

Real flows

The movement of goods and services and factors of production (labor, land, capital, entrepreneurship) through the economy.

Money flows

The movement of payments (spending, wages, rent, interest, profit) that correspond to real flows.

Households

Economic actors that own factors of production and purchase goods and services.

Firms

Economic actors that hire factors of production to make goods and services and sell output in the product market.

Factor market (resource market)

The market where households supply factors of production and firms demand them, paying income (wages, rent, interest, profit).

Product market

The market where firms supply goods and services and households (and others) demand them through spending.

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country’s borders in a given time period (usually a year or quarter).

Final goods and services

Goods and services purchased for end use; counted in GDP to avoid double counting of intermediate inputs.

Value added

A firm’s contribution to production; equal to revenue minus the cost of intermediate goods (used to avoid double counting).

Expenditure approach

A method of measuring GDP by adding total spending on domestically produced final goods and services: GDP = C + I + G + (X − M).

Consumption (C)

Consumer spending on final goods and services.

Investment (I) (GDP accounting)

Spending on new physical capital, new construction (including new housing), and changes in inventories; not purchases of stocks or bonds.

Government purchases (G)

Government spending on goods and services (e.g., roads, salaries of public employees); excludes transfer payments.

Transfer payments

Government payments not made in exchange for current goods/services (e.g., Social Security, unemployment); not included in G, though later spending may show up in C.

Exports (X)

Domestically produced goods and services sold to foreigners; added in GDP.

Imports (M)

Foreign-produced goods and services purchased domestically; subtracted in GDP to avoid counting foreign production.

Net exports (X − M)

Exports minus imports; the trade component of GDP that adjusts spending to reflect domestic production.

GDP per capita

GDP divided by population; used to compare average output per person but does not show income distribution or overall well-being.

Nonmarket production

Output not bought and sold in legal markets (e.g., unpaid household work, volunteer work); generally excluded from GDP, causing understatement of production.

Underground economy

Market activity hidden from authorities (often to avoid taxes/regulation), including some illegal activity; tends to make measured GDP understate true production.

Externalities

Costs or benefits of production/consumption not fully reflected in market prices (e.g., pollution); GDP does not subtract negative externalities from its total.

Nominal GDP

GDP measured using current-year prices; changes can reflect both output changes and price-level changes (inflation/deflation).

Real GDP

GDP adjusted for changes in the price level (using constant/base-year prices) to measure changes in actual output over time.

GDP deflator

A price index for domestically produced final goods and services: (Nominal GDP ÷ Real GDP) × 100; used to separate price changes from real output changes.