Gross Domestic Product

GDP Gross = entire; whole Domestic = within a country’s borders Product = good or service GDP = the whole amount of goods and services produced within a country’s borders

Gross Domestic Product (GDP) Despite its limitations, the most important measure of a nation’s economic performance is its Gross Domestic Product (GDP): the dollar value of all final goods and services produced within a country’s borders in a given year

Important Parts of the Definition of GDP Final goods and services are products in the form sold to consumers Intermediate goods are used in the production of the final goods Example: the price of a completed house (final good) is added to GDP, but not the items used to produce the house such as lumber, nails, windows, etc. (intermediate goods)

Important Parts of the Definition of GDP Produced within a country’s borders: Example for calculating the GDP of the United States: U.S. GDP includes cars made in Ohio by a Japanese car company but does not include cars made in Brazil by an American automaker

Nominal Versus Real GDP Nominal GDP=GDP measured in current prices Real GDP=GDP measured in constant (unchanging) prices Real GDP is more accurate because a general increase in prices can appear to make GDP rise, when in fact output has not risen Example: Movie Theatre Activity

Criticism of GDP Does not take into account a country’s standard of living (ex. literacy rate, mortality rate, income distribution, poverty, etc.) Gini Coefficient = level of income inequality (0 = perfect equality; 100 = perfect inequality)