6.1 Measuring the Size of the Economy: Gross Domestic Product

components of demand

consumer spending (consumption), business spending (investment), government spending on goods and services, and spending on net exports

final goods and services

to avoid the problem, which would overstate the size of the economy considerably, gov just count the value of final goods and services

GDP

value of all final goods and services produced within a country in given year

Gross National Product

GDP includes only what is produced within a country's borders. GNP adds what is produced by domestic businesses and labor abroad, and subtracts out any payments sent home to other countries by foreign labor and businesses located in the United States. In other words, GNP is based more on the production of citizens and firms of a country, wherever they are located, and GDP is based on what happens within the geographic boundaries of a certain country. For the United States, the gap between GDP and GNP is relatively small; in recent years, only about 0.2%. For small nations, which may have a substantial share of their population working abroad and sending money back home, the difference can be substantial.

depreciation

The process by which capital ages and loses value

Key Concepts and Summary

The size of a nation's economy is commonly expressed as its gross domestic product (GDP), which measures the value of the output of all goods and services produced within the country in a year. GDP is measured by taking the quantities of all goods and services produced, multiplying them by their prices, and summing the total. Since GDP measures what is bought and sold in the economy, it can be measured either by the sum of what is purchased in the economy or what is produced. Demand can be divided into consumption, investment, government, exports, and imports. What is produced in the economy can be divided into durable goods, nondurable goods, services, structures, and inventories. To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production.

Net National Product

calculated by taking GNP and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year.

what is produced

durable goods, nondurable goods, services, structures and change in inventories

trade balance

gap between exports and imports

intermediate goods

goods that go into production of other goods are excluded from GDP calculations

trade deficit

imports exceed imports

investment demand vs consumption demand

is far smaller than consumption demand, typically accounting for only about 15-18% of GDP, but it is very important for the economy because this is where jobs are created. However, it fluctuates more noticeably than consumption. Business investment is volatile; new technology or a new product can spur business investment, but then confidence can drop and business investment can pull back sharply.

double counting

output is counted more than once as it travels through the stages of production

investment expenditure

refers to purchases of physical plant and equipment, primarily by businesses