Gross Domestic Product (GDP)
Gross Domestic Product (GDP)
- Definition: The market value of all final goods and services produced within a country in a given period of time.
Key Aspects of GDP
- Market Value:
- Goods are valued at their market prices.
- All goods are measured in the same units (e.g., dollars in the U.S.).
- Things without a market value are excluded (e.g., housework done for oneself).
- Final Goods:
- GDP includes only final goods, which are intended for the end user.
- Intermediate goods (used as components in the production of other goods) are excluded because their value is already embodied in the final goods.
- Tangible and Intangible Goods:
- GDP includes both tangible goods (e.g., DVDs, mountain bikes, beer) and intangible services (e.g., dry cleaning, concerts, cell phone service).
- Currently Produced Goods:
- GDP only includes currently produced goods, not goods produced in the past.
- Within a Country's Borders:
- GDP measures the value of production that occurs within a country’s borders, regardless of whether it is done by its own citizens or by foreigners located there.
- Time Period:
- GDP is usually measured over a year or a quarter (3 months).
Components of GDP
- GDP represents total spending in an economy.
- Four main components:
- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX)
- Equation: Y = C + I + G + NX (where Y = GDP)
Consumption (C)
- Total spending by households on goods and services.
Investment (I)
- Total spending on goods that will be used in the future to produce more goods.
- Includes spending on:
- Capital equipment (e.g., machines, tools)
- Structures (e.g., factories, office buildings, houses)
- Inventories (goods produced but not yet sold)
- Note: Investment does not refer to the purchase of financial assets like stocks and bonds.
Government Purchases (G)
- All spending on goods and services purchased by the government at the federal, state, and local levels.
Net Exports (NX)
- Calculation: NX = exports - imports
- Exports: Foreign spending on the economy’s goods and services.
- Imports: Spending on foreign goods and services.
U.S. GDP and Its Components (Values in Billions)
- Y (GDP): 14,745
- C (Consumption): 10,366
- I (Investment): 1,907
- G (Government Purchases): 3,022
- NX (Net Exports): -550
- GDP per capita: 47,459
Calculating GDP - Examples
- A. Restaurant Dinner:
- Debbie spends 200 on dinner: Consumption and GDP increase by 200.
- B. Laptop Computer (Imported):
- Sarah spends 1800 on a new laptop built in China: Investment increases by 1800, but net exports decrease by 1800, resulting in no change to GDP.
- C. Computer (Past Production):
- Jane spends 1200 on last year’s computer model: Current GDP and investment are unchanged because the computer was built in the past.
- D. Car Production and Sales:
- General Motors builds 500 million worth of cars, but consumers only buy 470 million: Consumption increases by 470 million, inventory investment increases by 30 million, and GDP increases by 500 million. This accounts for the unsold inventory.
