Tuesday, August 30, 2011

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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