Understanding Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

The market value of all final goods & services produced within a country in a given period of time.

Microeconomics

Study of how households and firms make decisions and interact in markets.

Macroeconomics

Study of economy-wide phenomena including inflation, unemployment, and economic growth.

Economy's Income & Expenditure

For an economy as a whole, income must equal expenditure.

Final Good

A good intended for an end user.

Intermediate Goods

The components in the production of other goods.

Tangible Goods

Physical items that can be touched.

Intangible Services

Services that cannot be physically touched.

GDP Components Formula

Y = C + I + G + NX, where Y = GDP, C = consumption, I = investment, G = government purchases, NX = net exports.

Consumption (C)

Spending by households on goods and services.

Investment (I)

Spending on capital equipment, inventories, and structures.

Government Purchases (G)

Government consumption expenditure and gross investment, excluding transfer payments.

Net Exports (NX)

Calculated as Exports - Imports.

Recession

Two consecutive quarters of falling GDP.

Nominal GDP

Production of goods and services valued at current prices, not corrected for inflation.

Real GDP

Production of goods and services valued at constant prices, corrected for inflation.

Federal Debt

The total amount of money that the federal government owes, either to its investors or to itself.

Federal Surplus or Deficit

Occurs when the federal government runs a deficit, borrowing money to make up the difference between spending and revenue.

GDP and Economic Well-Being

GDP is considered the best single measure of the economic well-being of a society.

Senator Robert Kennedy, 1968

Critique of GDP, stating it does not account for the health of children, quality of education, or the joy of play.

GDP Limitations

GDP does not include leisure, the value of non-market activities, or the quality of the environment.

GDP and Life Expectancy

Indicators of quality of life are positively correlated with GDP.

GDP and Average Schooling

Higher GDP is associated with increased average schooling levels.

GDP and Overall Life Satisfaction

Measured on a scale from 0 to 10, showing correlation with GDP.

Real Nonresidential Fixed Investment

Expenditures by firms on capital such as tools, machinery, and factories.

Real Government Consumption and Gross Investment

Official measure of government purchases undertaken by the government sector.

Growth Rate

Average growth of real GDP has been 3% per year since 1965.