APMacro: Gross Domestic Product Review




GDP Review



  • Gross Domestic Product (GDP) is a basic measure of an economy’s economic performance. GDP is the market value of all final goods and services produced within the borders of a nation in a year.
  • Intermediate goods, nonproductive transactions, and secondhand sales are purposely excluded in calculating GDP.
  • GDP may be calculated by summing total expenditures on all final output or by summing the income derived from the production of that output.
  • By the expenditure approach, GDP is determined by adding consumer purchases of goods and services (C), gross investment spending by businesses (I), government purchases (G), and net exports (X): GDP = C + I + G + X.
  • Gross investment is divided into replacement investment and net investment. Replacement investment is required to maintain the nation’s stock of capital at its existing level. Net investment is the net increase in the stock of capital. In most years, net investment is positive and therefore the economy’s stock of capital and production capacity increases.
  • Price indexes are computed by dividing the price of a specific collection or market basket of output in a particular period by the price of the same market basket in a base period and multiplying the result, the quotient, by 100. The GDP price index is used to adjust nominal GDP for inflation or deflation and thereby obtain real GDP.
  • Nominal GDP measures each year’s output valued in terms of the prices prevailing in that year (current dollar). Real GDP measures each year’s output in terms of prices that prevailed in a selected base year (constant dollar). Because real GDP is adjusted for price level changes, differences in real GDP are due only to differences in production activity.
  • GDP is a reasonably accurate and very useful indicator of a nation’s economic performance, but it has its limitations. It fails to account for nonmarket and illegal transactions, changes in leisure and in product quality, the composition and distribution of output, and the environmental effect of production.

1) Chapter 6 p.122 #3, 8a, 9a, 11, 12, 13
2) Chapter 7 p.144 #2, 6, 8, 11, 14
3) Economic Indicators Quiz – Tuesday 3/1



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