Measuring the Size of the Economy: Gross Domestic Product (GDP) - Principles of Economics 3e

Introduction to GDP

Macroeconomics is empirical; understanding begins with measuring the economy.
GDP is the value of all final goods and services produced within a country in a given year.
Calculating GDP: multiply quantity of each product by its selling price and sum them up.
2020 US GDP: $20.9 trillion, largest globally.

Demand Side Components:
- Consumption: Largest component, ~67.2% of GDP.
- Investment: Business spending, ~17.4% of GDP.
- Government Spending: ~18.5% of GDP.
- Net Exports: Exports - Imports, usually a deficit for US (~3.1% negative impact).
Supply Side Components:
- Durable Goods: Long-lasting goods, ~16.7% of GDP.
- Nondurable Goods: Short-lived goods, ~13.4% of GDP.
- Services: Largest component, ~60.8% of GDP.
- Structures: Buildings, etc., ~9.1% of GDP.
- Change in Inventories: Very small, 0% of GDP.

Investment: Not stocks or bonds, but new capital goods, real estate, equipment.
Government Spending: Excludes transfer payments (e.g., Social Security).
GDP Calculation Methods:
- Expenditure Approach: Sum of consumption, investment, government spending, and net exports.
- Income Approach: Total income from wages, rents, interest, and profits.

Double Counting: Avoid counting intermediate goods to prevent overstating GDP.

GDP is a comprehensive measure of a nation's economic activity, reflecting both demand and supply-side activities.
Various methods and challenges exist in accurately measuring GDP.
Understanding GDP and related measures is crucial for economic analysis and policy-making.