Gross Domestic Product (GDP)

• GDP is a measure of output!

• Why Do We Care?

– Because output is highly correlated (at certain times) with things we care about the

(standard of living, wages, unemployment, inflation, budget and trade deficits, value of currency, etc…)

• Formal Definition:

– GDP is the  Market Value of all Final Goods and Services Newly Produced on Domestic Soil

                    During a Given Time Period (different than GNP)

Three ways of measuring GDP

Production Method:

Measure the Value Added summed across all firms (value added = sale price less cost of raw     materials)

• Income Method: Labor Income (wages/salary) + Capital Income (rent, interest, dividends, profits) + Government Income (taxes)

• Expenditure Method: Spending by consumers (C) + Spending by businesses (I)
 + Spending by government (G) + Net Spending by foreign sector (NX)

• Fundamental identity of national income account:
total production = total income = total expenditure



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