Econ105 Lecture 6: Economic Measurement 1—Gross Domestic Product
Economic Growth definition: The percentage change in real Gross Domestic Product (GDP)
over 2 time periods.
GDP definition: The market value of all final goods and services produced within a country in a
given time period.
GDP includes all items produced in the economy and sold legally in markets. GDP
measures not just apples, but also movies, haircuts, health care and so on. However,
GDP excludes some products that are difficult to measure, eg: items sold illegally, such
as illegal drugs.
We only measure the value of the final goods and services- things that can be used for
consumption. For example, a bike is a final good. It is made up of many intermediate
goods such as tyres, metal, handle, seats. We are only interested in the value of the bike,
not the value of each tyre.
GDP includes both tangible goods (food, clothing etc) and intangible services (doctor
GDP does not include transactions involving items produced in the past
When a Malaysian citizen works temporarily in NZ, her production is part of NZ’s GDP.
3 Methods of Measuring GDP
Value of all final
= Spending on all final goods and = Income from production of all
goods/services produced services final goods and services
Production method Expenditure method Income method
1. What we produced must be purchased by someone. Therefore production must equal
2. Income gained from production must be dispersed into some factors of production (eg:
to pay wages, pay rentals, kept as profit…)
3. We get the same value of GDP by using the 3 methods. The Components of GDP
Consumption (C) is spending by households on goods and services, with the
exception of purchases of new housing.
Investment (I) is the purchase of goods that will be used in the future to produce
more goods and services. Investment is the spending on capital equipment,
inventories and structures, including household purchases of new housing.
Government Purchases (G) include spending