Gross Domestic Product
Gross Domestic Product (GDP):
o Market value of the final goods or services produced within a country in a given time period.
o Measures total production, income, and expenditure.
o Shows the relationship between productivity and living standards.
o Market value: A price at which items are traded in markets
o Final good & service: An item that is bought by its final user during a specified time period
Intermediate good & service: An item that is produced by one firm, bought by another firm,
and used as a component of a final good.
Double counting: Counting the same item more than once that result from adding the value of
the intermediate goods and services to the value of the final good.
Flow of expenditure and income:
o Households & Firms:
Households sell and firms buy the services of labour, capital, and land in factor markets (Y)
Return the income to the economy by consuming (C)
Entrepreneurship receives profit.
Governments buy and firms sell the services (G).
Government expenditure is financed with taxes.
However, government transactions including taxes and transfers are not part of the diagram.
o Rest of the world:
Export: Selling goods and services to the rest of the world
Import: Buying goods and services from the rest of the world
Net exports: Exports – imports (NX)
GDP = Aggregate expenditure = Aggregate income = Y = C + I + G + NX:
o Y: Total income (including retained earnings) / Total expenditure
o C: Consumption expenditure
o I : Firm expenditure (Investment)
o G: Government expenditure
o X: Exports; M: Imports
o NX (X – N): Net exports
Depreciation: The decrease in the value of a firm’s capital that results from wear and tear and obsolescence
o Gross investment: Total amount spent buying new capital and replacing depreciated capital
o Net investment: Gross investment – depreciation Measuring Canada’s GDP
Expenditure approach: Measures GDP as a sum of C + I + G + NX
o Measures GDP by summing the incomes that firms pay households:
o Net domestic income at factor cost is the sum of:
Wages, salaries, and supplementary labour income
Other factor incomes
o Net domestic income at market price is the sum of:
Net domestic income at factor price
o GDP calculated using income approach is the sum of:
Net domestic income at market price
o GDP calculated using expenditure approach is the sum of:
GDP calculated using income approach
Statistical discrepancy (Total GDP expenditure – total GDP income)
Nominal GDP: Value of the final goods produced in a given year when valued at the prices of that year
o Just a more precise name for GDP.
o GDP (2010): B#B + D#D
Real GDP: Value of final goods produced in a given year when valued at the prices of a reference base year
o Used to compare GDP in two periods, to reveal the change in production.
o GDP (2010 – Base Year Method): B#A + D#C
G1 P G 1 Q G 2 P G 2 Q
2000 A #A C #C
Uses of Real GDP