The market value of all final goods and services produced within a country during a specific period.  It is a flow concept;

(1) only final goods and services count (2) Only transactions involving production count (3) Only production within the country is counted (4) Only goods produced during the current period are counted.

Intermediate Goods/

Final Market goods and services

 IG - goods purchased for resale or for use in producing another good or service

FG - goods and services purchased by their ultimate user.

Sales at intermediate stages of production are not counted by GDP because they value of the intermediate goods is embodied within the final-user good.

 Each good produced increases output by the amount the purchaser pays for the good. The total spending on all goods and services produced during the year is then summed, in dollar amounts, to obtain the annual GDP.

 Expenditure Approach - The GDP of an economy can be reached by totaling the expenditures on goods and services produced during the year.

Resource Cost-income Approach - GDP can be calculated by summing the income payments to the resource suppliers of the things used to produce those goods and services.

 Thus, GDP is a measure of bothe (1) the market value of the outpust produced and (2) the income geneated by those who produced the output.  this highlights a very important point: Increases in output and growth of income are linked. An expansion in output - that is, the additional production of goods and services that people value - is the source of higher income levels

 (1) Personal Consumption

(2) Gross Private Investment

(3) Government Consumption and Gross Investment

(4) Net Exports

 Household spending on consumer goods ans services during the current period.  Consumption is a flow concept.

 The flow od private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period.  These expenditures enhance our ability to provide consumer benefits in the future.

D - the estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.

 Changes in the stock of unsold goods and raw materials held during a period.

 Exports - goods and services produced domestically but sold to foreigners

Imports - Goods and services produced by the foreigners but purchased domestically

Net E = Exports - Imports 

 Summing of flows of costs incurred and income generated (labor is largest source)

(1) Indirect Business Taxes

(2) Depreciation

(3) Net Income of Foreigners

 Taxes that increase a business firm's costs of production and, therefore, the prices charged to consumers.  Examples are sales, excise, and property taxes.

Not direct payment to a resource owner; just an estimate.  Also called capital consumption allowance.

NI - the total income earned by a country's nationals (citizens) during a period.  It is the sume of employee compensation, self-employment income, rents, interest, and corporate profits.

Net Income of Foreigners - Income earned by "f" by contributing labor and capital resources to production within a country - income the nationals earn abroad

GNP - The total market value of all final goods and services produced by the citizens of a country. It is equal to GDP + net income of Foreigners

Adjusting for price changes/ deriving REAL GDP/ Nominal GDP

Real GDP

 Nominal Values - values expressed in current dollars

Real Values - Values that have been adjusted for the effects of inflation.

 An indicator of the general level of prices.  It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.

 A price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year (currently 2000).  Unlike the consumer price index the GDP deflator also measures the prices of capital goods and other goods and services purchased by the businesses and governments.  Because of this, it is thought to be more accurate than CPI

An increase in the general level of prices of goods and services.  The purchasing power of the monetary unit, such as the dollar, declines when inflation is present.

Inflation Rate = this year's PI - las year's PI

                              Last year's PI

 NGDP- GDP expressed at current prices. it is often called money GDP.

RGDP - GDP adjusted for changes in the price level.

RGDP_{current year}=NGDP_{current year} X GDP Deflator_{base year}

                                                GDP Deflator_{current yr}

Know these Terms (p.160-162)

GDP was designed to measure the value of the goods and services produced during a time period.  In spite of its limitation, Real GDP is a reasonably precise measure of hte rate of output and the year-to-year changes in that output.