Remember our three macroeconomic goals? There was 1) stable prices, 2) low unemployment, and 3) high and sustained growth. We're up to the third goal, high and sustained growth. The natural question now is, growth of what? The answer is that we want to see growth of the country's income -- the country's real income -- but how we measure it? Well, a country generates income by producing goods and services, and selling them. There are actually quite a few ways to look at a country's income. But when it comes to examining a country's growth, we look at its gross domestic product, or GDP. GDP is the total market value of all final goods and services produced in a given time period, within a country's borders. Think carefully about what this definition does and does not include as part of the country's income. If there's a US company that’s located abroad producing products, that does not count as part of the GDP. But if there's a foreign company located in the US producing products, that does count as part of the GDP. What about the “final goods and services” piece? The value of final goods and services -- that is, those items purchased by the ultimate consumer -- are counted in the GDP. The value of intermediate goods, that will be used as part of something else before getting to the hands of the final consumer, are not counted. Think of it this way: if you count the value of wheat, and then the value of the flour that's made from that wheat, and then the value of the loaf of bread that was made from the flour that was made from the wheat, you’ve counted the value of the wheat three times! The term “total market value” means the total value at that time period -- that's the nominal value -- of the final goods and services. Now that we know the definition of GDP, how do we actually measure it? Do I really need to know all of the final goods and services being produced, and today's market price for each, so that I can find the total value? Thankfully, there's an easier way for us to work with GDP: the expenditure approach. There's also what’s referred to as the income approach, but since we won't really be using that this semester, I’ll just set it aside for now.With the expenditure approach, you just think about what happens to all goods and services that we produce. Somebody has to buy all that stuff, right? Well, who? Who buys the goods and services that get produced? The goods and services are purchased by four sectors of the economy: 1) the household, or consumer, sector. In the United States, this represents the single largest sector, with its spending accounting for roughly 70% of the entire GDP. 2) the business sector. Businesses purchase capital goods, that is, machinery and equipment, constituting real investment. 3) the government sector. The government purchases goods and services so that it can function, and provide its services. 4) the foreign sector. Foreigners purchase a certain amount of our products and services; we call these exports. Of course, we also purchase from other countries; what we buy from the rest of the world is our imports. We’re interested in knowing, on net, what others buy from us, so we look at the net exports to the foreign sector, or exports minus imports. Altogether, GDP is the sum of the expenditures made by the four sectors of the economy: consumption, by the household sector; investment, by the business sector; government spending, by the government sector; and net exports, to the foreign sector. In short, GDP equals consumption, plus investment, plus government spending, plus net exports, or GDP = C + I + G + X. NEXT TIME: Real GDP TRANSCRIPT00(MACRO) EPISODE 20: GDP