# 6.1 Measuring the size of the economy: gross domestic product

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By the end of this section, you will be able to:

• Identify the components of GDP on the demand side and on the supply side
• Evaluate how gross domestic product (GDP) is measured
• Contrast and calculate GDP, net exports, and net national product

Macroeconomics is an empirical subject, so the first step toward understanding it is to measure the economy.

How large is the U.S. economy? The size of a nation’s overall economy is typically measured by its gross domestic product (GDP)    , which is the value of all final goods and services produced within a country in a given year. The measurement of GDP involves counting up the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services produced in the current year—and summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total. In 2014, the U.S. GDP totaled \$17.4 trillion, the largest GDP in the world.

Each of the market transactions that enter into GDP must involve both a buyer and a seller. The GDP of an economy can be measured either by the total dollar value of what is purchased in the economy, or by the total dollar value of what is produced. There is even a third way, as we will explain later.

## Gdp measured by components of demand

Who buys all of this production? This demand    can be divided into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services, and spending on net exports. (See the following Clear It Up feature to understand what is meant by investment.) [link] shows how these four components added up to the GDP in 2014. [link] (a) shows the levels of consumption, investment, and government purchases over time, expressed as a percentage of GDP, while [link] (b) shows the levels of exports and imports as a percentage of GDP over time. A few patterns about each of these components are worth noticing. [link] shows the components of GDP from the demand side. [link] provides a visual of the percentages.

Components of u.s. gdp in 2014: from the demand side
Components of GDP on the Demand Side (in trillions of dollars) Percentage of Total
Consumption \$11.9 68.4%
Investment \$2.9 16.7%
Government \$3.2 18.4%
Exports \$2.3 13.2%
Imports –\$2.9 –16.7%
Total GDP \$17.4 100%

## What is meant by the word “investment”?

What do economists mean by investment, or business spending? In calculating GDP, investment does not refer to the purchase of stocks and bonds or the trading of financial assets. It refers to the purchase of new capital goods, that is, new commercial real estate (such as buildings, factories, and stores) and equipment, residential housing construction, and inventories. Inventories that are produced this year are included in this year’s GDP—even if they have not yet sold. From the accountant’s perspective, it is as if the firm invested in its own inventories. Business investment in 2014 was almost \$3 trillion, according to the Bureau of Economic Analysis.

#### Questions & Answers

Don't damend work in inflation
conceptand variable of macro economics
Hi
Jafta
hi
Prashant
hello
hello
George
macro economics is the study of general factors in an economy.
George
what is fiscal policy?
talukder
fiscal policy refers to the use of government spending,taxation and borrowing to affect economic activity ,monetary policy on the other hand, entails the manipulation of interest rates.
A lots of thanks
talukder
you are welcome
Very informative talukder
Jafta
yes Jafta
talukder
So scarcity will always be a problem, is something that can't be solved due to specialization of labor and choice?
Jafta
yes right Jafta
talukder
good definition Jata♥♥
talukder
how are you all
Nurul
well
Asma
good
talukder
Kindly explain or give example of Voluntary unemployment.
when unemployment doesn't choose a accept job at wage of rate
talukder
Thanks Talukder
hi
kura
macroeconomics is not too hard
Omar
wow Omar, ur so helpful lol🤣
Alex
good ho every one
what's up guys■■
I want someone to tell me everything about the inflation and and hyber inflation is plz
Lolla
dot US Army higher South Korean citizen for the US base South Korea and pay them 50000 as a result
What is production possibility frontier
Production possibility frontier is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. The production possibility curve is frontir that all inputs are used efficiently.
.
what are some examples of a monetary policy?
expansionary policy contractionary policy
Steve
what is scarcity
scarcity is like having so much of goods and services to access and you want them
Steve
Yes
Saraswati
how to calculate GDP
Steve
Gdp =c+I +nx +G
Saraswati
GDP=rent+interest+wages and salaries+profit
what are the assumptions of the marginal utility theory ?
Diann
GDPfc=GDI+stock dep-stock app+- residual errors
Diann
marginal cost and marginal benefits
what is unemployment
The total number of people in the labor force who are willing to work and actively looking for a job but cannot find one.
Bene
Heckchers Ohlin theory of International trade
but if I may ask what brings this poverty in existence and how can such actions be deminish in our generation
Poverty comes from many factors, ranging from very low income for the households sector (purchasing power is low), basic needs such as safe drinking water, lack of sustainable development goals (roads, agriculture, technology, power, etc), business sector is poor, etc
Such action can be diminished by effectively and efficiently using the four (4) factors of production. Land, Labor , Capital and Technology.
Poverty - Increase in the cost of living without subsequent increase in the amount of minimum wage. Poverty can be reduced extremely if the minimum wage equals or equals more than the cost of living.
harmony
land labour capital and organisation factors of production
divya
what are positive and normative statements
p
Mohd
positive is realistic normative is imaginary
Prashant
give basic idea about India's national income
what are the sources of recessions and booms
A few years ago, Ama paid \$500 to put together a record collection. Today she sold her albums at a garage sale for \$100. how does the same affect GDP?
It saves time its creates more employment
Scarcity means human wants exceeds the resources needed to satisfy them 1. Limited resources 2. Numerous human wants
Gold
Scarcity means shortage!!!
Lewis
Gold you're knowlwgist bro keep going lion
Moha
hmm am fresh here oh
Andy
Being newest means u have it all!!!
Lewis
where you from university of malakand.or where are you.
Naeemuddin
What is mean by small open economy ?
Gecho