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Section 1 Gross Domestic Product

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Objectives

After studying this section you will be able to:

1. Identify National Income and Product Accounts (NIPA).
2. Explain how gross domestic product (GDP) is calculated.
3. Explain the difference between nominal and real GDP.
4. List the main limitations of GDP.
5. Describe other income and output measures.
6. Identify factors that influence GDP.

Section Focus

There are several ways to evaluate a nation's economic performance. Gross domestic product (GDP) is the most important, despite its limitations. GDP changes in response to shifts in aggregate supply or aggregate demand.

Key Terms

• national income accounting
• gross domestic product
• intermediate goods
• durable goods
• nondurable goods
• nominal GDP
• real GDP
• gross national product
• depreciation
• price level
• aggregate supply
• aggregate demand

Early economists believed that a national economy would regulate itself. Periods of high unemployment and low income and output would be temporary and short-lived and would be corrected automatically.

These ideas about the economy lasted until the Great Depression, a severe economic decline that started in 1929 and lasted for over a decade. This economic avalanche, touched off by the Great Crash of the stock market in October 1929, devastated the U.S. economy. The length and depth of the Great Depression convinced many economists that they must find a way to monitor the macro-economy's performance so that they could predict economic downturns and try to prevent them.

National Income and Product Accounts

Keeping track of the U.S. economy is an enormous task. Today, economists monitor important macroeconomic data using national income accounting, a system that collects statistics on production, income, investment, and savings. The data are compiled and presented in the form of National Income and Product Accounts (NIPA), which are maintained by the U.S. Department of Commerce. NIPA data are used to determine economic policies that you will read about in Chapters 15 and 16.

Gross Domestic Product

The most important of the measures in NIPA is gross domestic product (GDP), the dollar value of all final goods and services produced within a country's borders in a given year. This carefully worded definition conveys a lot of information that we should consider piece by piece.

Dollar value is the total of the selling prices of all goods and services produced in a country in one calendar year, which are added up to calculate GDP. Final goods and services are products in the form sold to consumers, as opposed to intermediate goods, which are used in the production of final goods. Produced within a country's borders is especially important to remember. For example, U.S. GDP includes cars made in Ohio by a Japanese car company.

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