Chapter 20: Measuring GDP and Economic Growth
GDP or gross domestic product is the market value of the final goods and services produced within a
country in a given time period. This definition has 4 parts:
• Market Value
o In order to measure total production, we must have one uniform measure to
compare different products. By valuing items at their market price, we can determine the
value of total production
• Final goods and services
o When calculating GDP, only the final goods and services produced count towards
the GDP as counting intermediate goods would result in counting the same value
• Produced within a country
Only goods and services that are produced within a country count as part of that
country's GDP. A foreign company producing in Canada counts towards Canada's GDP.
• In a given time period
o Normally calculated in ¼ of the year (quarterly GDP data), or a year (annual GDP
Households are sellers in the factor market and buyers in the goods market. Households sell
services of labour, capital, and land to firms and buy consumer goods and services from firms in the
Firms are sellers in the goods market and buyers in the factor market. Firms pay income for the
services of labour, capital and land provided by households and in turn sell consumer goods and
services to households.
Y = Total income paid by firms to households
C = Consumption expenditure – the total payment for consumer goods and services
I = Investments – firms buy and sell capital goods and inventories
G = government expenditure – governments finance their expenditure with taxes, and pay financial
transfers to households in the form of unemployment benefits and subsidies to firms.
These financial transfers are not part of the circular flow of expenditure and income
X – M = Net exports (the value of exports minus the value of imports)
When net exports are positive (exports exceed imports) the net flow of goods and services is from
Canadian firms to the rest of the world.
When net exports are negative (imports exceed exports) the net flow of goods and services if from
the rest of the world to Canadian firms.
Exports – firms sell goods to the rest of the world (added to GDP)
Imports – firms buy goods from the rest of the world (subtracted from GDP)
Y = C + I + G + X – M
Income = Expenditures
Gross Domestic Product is the market value of the final goods and services produced within a