Macroeconomics

Gross domestic product (GDP) is a measurement used to determine the size of the economy at a given point in time and growth of the economy over time. GDP measures final goods and services, or goods and services sold to an end user. As an example, tires are sold to companies that produce cars. These tires are not counted in GDP. They are an intermediate good used in the production of a final good. When a consumer buys tires to replace worn-out tires, they are counted in GDP.

• GDP is the dollar value (total market value) of all final goods and services produced within a country’s borders in a year.
• GDP per capita (per person) is the GDP divided by the population. It identifies, on average, how many goods and services a person produces.

Final goods and services do not need to be produced by U.S. companies to be included in the U.S. GDP. As long as the companies are within the United States’ borders, production is counted in GDP. If U.S. companies produce final goods and services in another country, production is not counted in the U.S. GDP.

Real GDP is the best measure of economic growth.

• Nominal GDP is measured in current prices. It does not account for inflation from year to year. Nominal GDP increases with inflation and decreases with deflation.
• Real GDP is measured in constant, or unchanging, dollars. It adjusts for inflation.
• A change in GDP could mean that
• the country has produced more goods and services;
• the country has produced the same goods and services, but prices have increased; or
• the country has some combination of more goods and services produced and higher prices.

GDP can be estimated by using the expenditure approach:

• Y = C + I + G + (X − M) OR
• GDP = consumption + investment + government purchases + (exports − imports)

The following are NOT included in GDP:

• Financial transactions like stocks, bonds, and real estate (non-production transactions)
• Used goods like old cars (non-production transactions)
• Household products made at home (non-market)
• Illegal activities like unpaid work or drugs
• Intermediate goods