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Gross domestic product (GDP) is the market value of all final goods and services from a nation in a given year. Countries are sorted by nominal GDP estimates from financial and statistical institutions, which are calculated at market or government official exchange rates .
GDP, or Gross Domestic Product, is the total monetary value of all goods and services produced and sold within a country during a specific time period, typically one year. ( learn more ). World's GDP is $100,562,000,000,000 ( nominal , 2022)
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What is Gross Domestic Product (GDP)?
What does GDP stand for?
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What is GDP & how is it calculated?
- Key points
- Introduction
- GDP measured by components of demand
- GDP measured by what is produced
- The Problem of Double Counting
- Summary
- Self-check questions
- Review questions
- Problem
•The size of a nation’s economy is commonly expressed as its gross domestic product, or 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 final goods and services produced and sold in markets, multiplying them by their current prices, and adding up the total.
•GDP can be measured either by the sum of what is purchased in the economy using the expenditures approach or by income earned on what is produced using the income approach.
•The expenditures approach represents aggregate demand (the demand for all goods and services in an economy) and can be divided into consumption, investment, government spending, 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—adding the value of output to the GDP more than once—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.
•The gap between exports and imports is called the trade balance. If a nation's imports exceed its exports, the nation is said to have a trade deficit. If a nation's exports exceed its imports, it is said to have a trade surplus.
To understand macroeconomics, we first have to measure the economy. But how do we do that? Let's start by taking a look at the economy of the United States.
The size of a nation’s overall economy is typically measured by its gross domestic product, or GDP, which is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting up the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services produced in the current year—and summing them into a total dollar value.
The numbers are large, but the task is straightforward:
Step 1: Take the quantity of everything produced.
Step 2: Multiply it by the price at which each product sold.
Step 3: Add up the total.
$17.4 trillion is a lot of money! Who buys all of this production? Let's break it down by dividing demand into four main parts:
•Consumer spending, or consumption
•Business spending, or investment
•Government spending on goods and services
•Spending on net exports
[What does investment mean exactly?]
Everything that is purchased must be produced first. Instead of trying to think about every single product produced, let's break out five categories: durable goods, nondurable goods, services, structures, and change in inventories. You can see what percentage of the GDP each of these components contributes in the table and pie chart below.
Before we look at these categories in more detail, take a look at the table below and notice that total GDP measured according to what is produced is exactly the same as the GDP we measured by looking at the five components of demand above.
Since every market transaction must have both a buyer and a seller, GDP must be the same whether measured by what is demanded or by what is produced.
Source: http://bea.gov/iTable/index_nipa.cfm
Let's take a look at the graph above showing the five components of what is produced, expressed as a percentage of GDP, since 1960. In thinking about what is produced in the economy, many non-economists immediately focus on solid, long-lasting goods—like cars and computers. By far the largest part of GDP, however, is services. Additionally, services have been a growing share of GDP over time.
You are probably already familiar with some of the leading service industries, like healthcare, education, legal services, and financial services. It has been decades since most of the US economy involved making solid objects. Instead, the most common jobs in the modern US economy involve a worker looking at pieces of paper or a computer screen; meeting with co-workers, customers, or suppliers; or making phone calls.
GDP is defined as the current value of all final goods and services produced in a nation in a year. But what are final goods? They are goods at the furthest stage of production at the end of a year.
Statisticians who calculate GDP must avoid the mistake of double counting—counting output more than once as it travels through the stages of production. For example, imagine what would happen if government statisticians first counted the value of tires produced by a tire manufacturer and then counted the value of a new truck sold by an automaker that contains those tires. The value of the tires would have been counted twice because the price of the truck includes the value of the tires!
To avoid this problem—which would overstate the size of the economy considerably—government statisticians count just the value of final goods and services in the chain of production that are sold for consumption, investment, government, and trade purposes. Intermediate goods, which are goods that go into the production of other goods, are excluded from GDP calculations. This means that in the example above, only the value of the truck would be counted. The value of what businesses provide to other businesses is captured in the final products at the end of the production chain.
Take a look at the table above showing which items get counted toward GDP and which don't. The sales of used goods are not included because they were produced in a previous year and are part of that year’s GDP.
The entire underground economy of services paid “under the table” and illegal sales should be counted—but is not—because it is impossible to track these sales. In a recent study by Friedrich Schneider of shadow economies, the underground economy in the United States was estimated to be 6.6% of GDP, or close to $2 trillion dollars in 2013 alone.
Transfer payments, such as payment by the government to individuals, are not included, because they do not represent production. Also, production of some goods—such as home production as when you make your breakfast—is not counted because these goods are not sold in the marketplace.
•The size of a nation’s economy is commonly expressed as its gross domestic product, or 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.
•GDP can be measured either by the sum of what is purchased in the economy or by 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—adding the value of output to the GDP more than once—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.
•The gap between exports and imports is called the trade balance. If a nation's imports exceed its exports, the nation is said to have a trade deficit. If a nation's exports exceed its imports, it is said to have a trade surplus.
Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP?
[Show solution.]
Which of the following are included in GDP, and which are not?
•The cost of hospital stays
•The rise in life expectancy over time
•Child care provided by a licensed day care center
•What are the main components of measuring GDP with what is demanded?
•What are the main components of measuring GDP with what is produced?
•Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse?
•Why must double counting be avoided when measuring GDP?
Last year, a small nation with abundant forests cut down $200 worth of trees. $100 worth of trees were then turned into $150 worth of lumber. $100 worth of that lumber was used to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in the production of trees, lumber, and bookshelves, what is this nation's GDP?
In other words, what is the value of the final goods produced including trees, lumber and bookshelves?
Key Points. Since GDP is measured in a country’s currency, in order to compare different countries’ GDPs, we need to convert them to a common currency. One way to compare different countries' GDPs is with an exchange rate, the price of one country’s currency in terms of another. GDP per capita is GDP divided by population. Introduction.
As of 2022, the global GDP amounted to over 100 trillion U.S. dollars. Looking at individual countries, the United States has the largest in the world with 25 trillion U.S. dollars as of 2022...
Country. Most Recent Year. Most Recent Value. Gross capital formation (% of GDP) from The World Bank: Data.
Gross Domestic Product (GDP) is a monetary measure of the market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic health of a country or region.
