GDP (Gross Domestic Product)

intermediate goods

goods that are used in the production of a final product; for example, tires are final goods when Katherine buys them at the tire store. But when Acme Motor Company buys tires to build a car that they plan on selling, those tires would be considered intermediate goods.

expenditures approach to GDP

one of the three approaches to calculating GDP that involves adding up all spending on final goods and services in an economy; the expenditures approach categories this spending into five categories: consumption, investment, government spending, exports, and imports: Y=C+I+G+X-MY=C+I+G+X−MY, equals, C, plus, I, plus, G, plus, X, minus, M.

net exports X-M

spending on exports minus spending on imports' "exports" is the value of goods that go out of a country, "imports" is the value of the goods that come into a country. There is a trade deficit when imports are higher than exports and there is a trade surplus and when exports are higher than imports.

final goods and services

the goods and services that are purchased by consumers, businesses, the government, or other countries in their final form for their intended final use; for example, a car purchased by a household, a haircut, or a laptop bought by a student.

gross domestic product (GDP)

the market value of the final production of goods and services within the geographic borders of a country in a given period; for example, if the GDP of India is $2.264 trillion in 2016, this means that this is the value of all new goods and services that were produced inside the border of India, excluding intermediate goods, during 2016.

consumption (C)

when using the expenditures approach, "C" is the category of GDP that is spending by households on final goods and services in a given year but excludes spending on new housing

transfer payment

any payment by a government to a household that is not in exchange for a good or service; for example, if the government hires a contractor they are buying a service that is included in GDP, but if they send a retired person a pension check they are not buying a good or service and it is not counted in GDP.

value-added approach to GDP

an approach to calculating GDP that involved adding up all of the value added at various stages of production; for example, in the production of a cake that sells for $12, the value-added approach counts the value of the raw ingredients that a farmer sells to the baker $4, which a baker then combines with her capital to create a cake, which adds $8 in value.

income approach to GDP

an approach to calculating GDP that involves adding up all of the income earned within the borders of a country in a given year; the income approach adds up wages, rents, interest, and profits.

imports (M)

goods that are produced in a different country than where they were purchased; for example, those bobblehead dolls made in the U.S. are purchased by Japanese consumers, so they would get counted initially as consumption ("C") for Japan. Since they do not reflect something that was produced in Japan, they are subtracted from Japan's GDP as an import ("M").

exports (X)

goods that are produced in one country and then sold within another country; for example, if a producer in the United States makes 400400400 Katnest Evergreen bobblehead dolls and sells them to a store in Japan, these dolls would be counted as Exports for the United States.

government spending (G)

when using the expenditures approach, "G" is the spending by government entities, whether local or national governments, on goods and services such as building roads and national defense; note that transfer payments are not included in "government spending" in GDP even though it is something that is part of the money that a government might spend each year.

investment (I)

when using the expenditures approach, "I" is the category of GDP that is spending businesses do in order to produce goods and services (such as buy computers for accountants to use or build factories to build cars); investment includes spending on capital goods (tools, equipment) and inventory.