ECO 2013-Chapter 7: Gross Domestic Product (GDP)

What does GDP measure?

The market value of all final goods and services produced within a country’s borders in a given time period

What types of goods/services does GDP include?

Apples, computers, haircuts, doctor visits—anything sold in markets

How are different goods added into GDP?

By converting them to their market value ($)

What are final goods?

Goods purchased by the final user (e.g., a new car)

What are intermediate goods?

Goods used to produce other goods (e.g., tires used in new cars) — not counted in GDP

Are used goods included in GDP?

No—only new goods count

What does “produced within the borders” mean?

Goods made inside the country, regardless of ownership (foreign or domestic)

What counts toward the time period for GDP?

All production within the quarter or year, seasonally adjusted

Do financial transactions count (stocks, bonds)?

No—only market production counts

Does hiring someone privately (e.g., student help moving) count?

Yes—this is a paid market service

What are the four expenditure categories of GDP?

Consumption, Investment, Government Purchases, Net Exports

What is the expenditure formula for GDP?

GDP = C + I + G + NX (NX = exports – imports)

What is consumption?

Consumer spending on new goods and services excluding new houses

What is investment?

Spending by firms on new capital, residential construction, and inventory changes

Do stocks and bonds count as investment in GDP?

No—those are financial assets, not goods/services

What are government purchases?

Government spending on new goods/services (education, defense, roads)

What are transfer payments?

Payments such as Social Security, unemployment benefits, food assistance—do not count in GDP

What are exports?

Goods/services sold to foreigners—added to GDP

What are imports?

Goods/services produced abroad—subtracted in GDP (already counted in C, I, G)

What is the income approach to GDP?

Adds wages, interest, rental income, and profits to measure national income

What is double counting?

Counting an intermediate good twice (e.g., including tires sold to automakers)—this is avoided

What is value added?

The value of output minus the value of intermediate goods purchased

Example: A bakery sells bread for $1.50 and a store sells it for $2.00. What is the total value added?

$2.00 (GDP contribution).

• Bakery value added: $1.50

• Store value added: $0.50

What is nominal GDP (NGDP)?

GDP calculated using current-year prices

What is real GDP (RGDP)?

GDP calculated using base-year prices to remove inflation effects

Formula for NGDP?

Current output × current prices

Formula for RGDP?

Current output × base-year prices

What does the base year mean in GDP?

The year whose prices are used to compute real GDP

What is the GDP deflator used for?

To measure the overall price level (inflation)

Formula for GDP deflator?

(Nominal GDP ÷ Real GDP) × 100.

Formula for inflation using the GDP deflator?

((Deflator new​ − Deflator old​​)/ Deflator old)×100

What is GDP per capita?

Real GDP ÷ population

What does GDP per capita measure?

A rough indicator of standard of living

Why is GDP an imperfect measure of well-being?

It omits home production, illegal activity, unreported work, pollution, leisure, health, and education quality

Does GDP measure crime rates or life expectancy?

No—these are outside GDP

Why does GDP not include home production?

There is no market transaction or observable price

Why doesn't GDP include leisure?

It has no market value despite improving well-being

What does GDP do well?

Measures total market production and economic activity