Chapter 5 – Measuring Economic Activity
GDP – a measure of the total value of goods and services produced in a country during a year. It allows
policymakers to see whether the economy is contracting or expanding. It is equal to the total production
of consumption and investment goods, government purchases, and net exports.
- GDP = C + I + G + X
GDP can either be measured as a flow or products or as a sum of earnings
Flow of product approach – only final goods are calculated in this, meaning the goods bought and used.
This approach calculates the total money value of the flow of final products produced in the nation.
Earnings or Income Approach – statisticians can measure the flow of business costs such as the earnings
that households receive from firms, wages paid to labor, rents paid to land, and profits paid to capital.
- GDP = Wages + Interest + Rents + Profits
Account – a numerical record for all flows during a given period for a firm or nation
Intermediate goods (goods used to produce final goods) are not calculated in GDP. Only the value added
is included in the calculation.
Value added – the different between a firm’s sales and its purchase of materials from other firms
- Include all costs in GDP except for those payments made to other businesses
Nominal GDP – GDP at current prices, using the actual market prices of that particular year
Real GDP – an index of the quantity of goods and services produced after removing the influences of
changing prices or inflation.
- The difference between the two is the price of GDP or the GDP deflator.
- Real GDP is calculated according to a base year, the year you measure the prices against.
Consumption – the largest component of GDP, divided into three categories of durable goods, nondurable
goods, and services.
Investments – additions to the nation’s capital stock of buildings, equipment, software, and inventories
during a year. Increasing capital requires sacrificing current consumption to increase future consumption.
- Gross investment is included in GDP, which is not adjusted for depreciation. It includes all the
investment goods produced.
- To estimate the increase in capital stock, we measure net investment, which is gross investment –
Government consumption – includes government payroll expenditures and the cost of goods it buys from