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
  • 70.3% of GDP
• I (Investment): 1,907
  • 12.9% of GDP
• G (Government Purchases): 3,022
  • 20.5% of GDP
• NX (Net Exports): -550
  • -3.7% of GDP
• 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.