What is GDP?
Gross Domestic Product — the total market value of everything a country produces in a year — is the single most-watched number in macroeconomics, and also the most misunderstood.
The definition
GDP is the market value of all final goods and services produced within a country's borders in a given period. Three things to notice: it's market value (so non-market work like household labor doesn't count), it's final (so a flour mill's flour is only counted when sold as bread — not separately, to avoid double counting), and it's within borders (so a German-owned factory in Texas counts toward U.S. GDP).
Real vs nominal
Nominal GDP uses today's prices. Real GDP uses a base year's prices. Real GDP adjusts for inflation, so it's the right number when you want to know "did we actually produce more?"
If nominal GDP rises 8% and inflation was 3%, real GDP rose about 5%. The growth rate of real GDP per capita is the most common measure of how living standards are changing over time.
Three ways to count it
The same GDP total can be reached three ways. The expenditure approach adds C + I + G + (X − M): consumption, investment, government spending, net exports. The production approach sums value added at every stage. The income approach sums wages, rents, interest, and profits.
They give the same number (with small measurement differences) because every dollar spent on a good is also a dollar earned by the producer. That's the fundamental identity behind national income accounting.
Flashcard · Unit 1
Market value of all final goods and services produced within a country in a period.
Check your understanding
Which of the following is not counted in GDP?