Measuring GDP
Mr. Henry
AP Economics
Why GDP?
• Just as a business would
analyze their accounts to
determine their health as a
business, so too does our
country
• The Bureau of Economic
Analysis (BEA) compiles the
National Income and Product
Accounts (NIPA) for the U.S.
economy
• From the BEA, we can:
- Asses the health of the economy by
comparing levels of production at regular
intervals
- Track the long-run course of the economy to
see whether it has grown, been constant, or
declined
- Formulate policies that will safeguard and
improve the economy’s health
• Our GDP is based on our aggregate output, or the
dollar value of all final goods and services
produced within the borders of a given country
during a given period of time, typically a year
• GDP is a monetary measure, so we compare the
values of the vast number of goods and services
produced in different years.
The GDP
Wait…can’t something be counted twice??
• GDP must count items only once, so to avoid counting
twice we count only final goods, not intermediate
goods.
• Intermediate Goods are goods and services that are
purchased for resale or for further processing or
manufacturing
• Final Goods are consumption goods, capital goods, and
services that are purchased by their final users, rather
than for resale or for further processing or
manufacturing
• This avoid multiple counting and distorting the GDP!
• Value added is the market value of a firm’s output
less the value of the inputs the firm has bought
from others.
$120 (VA = $120)
$180 (VA = $60)
$220 (VA = $40) manufacturer
Total Sales Values = $1140
Value Added (Total Income) = $350
So for the GDP, we could use the
final cost of the item, $350 at
Hollister, or the Value Added
$270 (VA = $50) wholesaler
$350 (VA = $80)
Intermediate or Final Good?
• There are two ways to measure GDP
• We can determine GDP as the value of output by
summing all expenditures on that output
• Or, we can determine GDP by adding up all the
components of income arising from the production
of that output
Expenditures Approach
• To determine GDP using the expenditures
approach, we add up all the spending on final
goods and services that has taken place
throughout the year.
• Personal Consumption Expenditures covers all
expenditures by households on durable consumer
goods, nondurable consumer goods, and services.
Personal Consumption (C)
Gross Private Domestic Investment (I)
• (I) includes:
- All final purchases of machinery, equipment,
and tools by business enterprises
- All construction
- Changes in inventories (unsold goods)
Government Purchases (G)
• Government consumption expenditures and gross
investment
- Expenditures for goods and services that the
government consumes in providing public services
- Expenditures for publicly owned capital
Net Exports (Xn)
• Foreign spending on our exports must be
included in GDP
• HOWEVER, some expenditures for C, I, and G
are for domestically produced goods and
services!
• So, we must subtract off the spending that
goes to imports, (M).
• GDP = C + Ig + G + X-M or GDP = C + Ig + G + Xn
• As was the case in 2002 and in your book
table 24.3, notice that net exports are minus
AP Sample Questions
• Please review the AP Sample Questions on
GDP and keep them in your notebook!