K. A. Kramer, © 2009
Gross Domestic Product (GDP)
One of the things economists want to know is how well off the people in a country are.
How well off people are is quite subjective, and can be measured many different ways.
The most common way for macroeconomists to answer this question is to look at a
standard of living
Here we will define the standard of living as the level of
goods and services a person can enjoy.
So a nation’s standard of living is the level of
goods and services that a person living in that country can enjoy, on average.
Gross Domestic Product
When consumers consume a good or service, they are consuming final goods and
final good or service
is a good or service that is sold to the final, or end,
So if I buy a new PC from Dell, I am buying a final good.
However, when Dell
bought the Intel hard drives they needed to manufacture their computers, those hard
drives are considered
or goods that are used as an input to produce a
What is a final good versus what is an intermediary good can depend on what
it is used for.
For example, if I buy some rose pedals for my wedding, they are
considered final goods.
I am the end user.
However, if my bakery buys some rose pedals
to put on my wedding cake, those rose pedals are considered intermediary goods, because
the bakery is not the final user, I am.
Gross domestic product
, is the total value or all
goods and services
produced in an economy during a given period, usually a year.
There are a number of
ways to calculate GDP.
The first is the
In order to calculate GDP
using the expenditure approach, we add up the value of all the final goods and services
that we produced in a country in a given year.
So lets say in my country all we produce
is pizza and beer, and in the last year I have produced 10 pizzas which sold for $5.00 a
pizza and 20 beers which sold for $2.50 a beer.
So the total value of pizzas would be
$5.00 x 10 = $50, and the total value of beer would be $2.50 x 20 = $50.
GDP = total value of final goods and services =
Notice that the flour, and tomato sauce I use to make my pizzas and the barley and hops I
use to make my beer
included in the calculation.
That’s because they are not final
We only include final goods in GDP to avoid double counting.
If I included the
flour in my calculations, for example, I would be counting it twice.
Once as flour, and
again since it is part of the pizza.
Now even the economy of the smallest country has millions and millions of different