Gross Domestic Product (GDP)
In case you didn’t realize it, you are through the looking glass now.
I. What is GDP?
a. GDP is the primary indicator for measuring economic
b. Definition: The total value of all final goods and services
produced in an economy during a given period, usually a year.
i. Final products (goods and services) are products that
are sold to final or end user.
- most goods you have purchased fall in this
ii. Intermediate products are products that are inputs for
the production of final goods and services.
c. It can be calculated in several ways, all of which yield the
a. Value Adding Approach
1. Survey firms and find out the value of their production
of final goods and services.
b. Expenditures Approach (The one we will use)
1. Logically, GDP must equal the flow of funds received by
firms from their sales in the product market.
2. Recall the circular flow.
i. the basic rule of accounting says flows must be
3. So…if we add up the dollar value of all consumer
spending(investment), government spending and the
value of exports minus imports(net exports), we should
That is Y(GDP)= C + I + G + Nx
4. The adds up the aggregate, or total, spending in the
c. Income Method
1. Logically, flows on the circular flow have to be equal.
2. So…if we looked at the sum total of household incomes,
this will also give us GDP
BECAUSE ONE PERSON’S SPENDING IS ANOTHER