Gross Domestic Product
Gross domestic product
, is the market value of
all the final goods and services produced within in a
country in a given time period.
final good or service
is an item that is bought by
its final user during a specified time period. In con-
is an item produced by
one firm, bought by another and used as a compo-
nent of a final good or service. Intermediate goods
are not directly included in real GDP.
The circular flow of income and expenditure shows real
and monetary flows in the economy. The circular flow
Four economic sectors — households, firms, gov-
ernments, and the rest of the world.
Three major markets — factor markets, goods mar-
kets, and financial markets.
In these markets people make their economic decisions
by choosing the amounts of key economic variables:
) — total house-
hold spending on consumption goods and services.
) — firms’ purchase of new plants,
equipment, buildings, and additions to inventories.
) — government
expenditure on goods and services.
are taxes paid to the government minus transfer
payments received from governments and minus in-
terest payments on the government’s debt.
sales of U.S.
* This chapter is Chapter 21 in
goods and services abroad) minus
chases of foreign good and services).
, equals aggregate
production, GDP, and also equals aggregate income,
This equality is the basis for measuring GDP.
equals saving by households and
businesses plus government saving:
Borrowing from the rest of the world equals
Investment is financed by national saving plus borrow-
ing from the rest of world,
I = S +
is a quantity over a unit of time. A
quantity that exists at a moment in time. Wealth and
capital are stocks; saving and investment are flows.
, the value of things that people own, is a
, what people earn, is a flow.
Saving is the amount of income remaining after
spending on consumption. Saving is a flow that
adds to wealth.
, the amount of plant, equipment, and in-
ventories used to produce other goods, is a stock.
) is the
decrease in the capital stock because of wear and
tear and obsolescence.
is the total
amount of investment.
amount by which the capital stock changes. Net in-
vestment equals gross investment minus deprecia-
Gross domestic product includes depreciation and so