GDP

Definition Gross Domestic Product: The dollar value of all final goods and services produced within a country’s borders in a given year. GDP is considered an indicator of a country’s wealth. Note that final goods are those that are sold to consumers, and not used to produce other goods. Goods produced by US companies abroad are not included in GDP. Goods produced by foreign companies in the US are included in GDP.

Calculation of GDP Expenditure approach: Income approach: Add the total spent by consumers on goods and services. Income approach: Add the amount of income received by individuals who help produce goods and services. Ideally, both approaches give identical totals.

Nominal GDP v. Real GDP Nominal GDP: Each year’s GDP is based on its own price levels. For example, the GDP for 1950 represents much lower price levels than that for 2000. Changes in nominal GDP are not as meaningful as they could be, since an increase could possibly be due mainly to higher price levels.

Nominal GDP v. Real GDP, cont. Each year’s GDP is adjusted to account for changes in price levels, so it gives a more accurate picture of economic growth. For example, the GDPs for both 1950 and 2000 may be expressed in this year’s (or any other year’s) dollars. When real GDP increases, the economy is growing. When real GDP decreases, the economy is shrinking.

Nominal GDP v. Real GDP, cont. 1950: 293.7 billion 2000: 9,951.5 billion The nominal GDP for 2000 is almost 34 times that for 1950. Real GDP 1950: 15.872 2000: 88.852 The real GDP for 200 is less than 6 times that for 1950. (These numbers are indexed so that the 2005 real GDP = 100.)

GDP Per Capita When comparing different countries’ GDPs, it can be misleading when one country has a much greater population than the other. GDP per capita addresses this problem by dividing a country’s GDP by its population. This is a much better means of comparing the wealth of different countries.

GDP Per Capita, cont. Country 2008 GDP (in billions) 2009 Population Bangladesh $81.938 156,050,900 $532 China $4,401.61 1,338,613,000 $3,309 India $1,209.69 1,166,079,000 $1,061 Japan $4,923.76 127,078,700 $38,782 United Kingdom $2,674.09 61,113,200 $43,878 United States $14,264.6 307,212,100 $46,914

Aggregate Demand and Supply Aggregate = overall for the entire country Aggregate demand (AD) and aggregate supply (AS) are used in macroeconomics to understand changes in real GDP. They work essentially the same way as demand and supply in microeconomics. Instead of price and quantity, we use price level and real GDP. Price level is essentially the average price for all goods and services for a country. Real GDP is the easiest way to measure the quantity of all goods and services for a country.