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gdp

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Gross Domestic Product (GDP)

Definition of (US) GDP

Dollar (or market) value of all final use output (goods and services) produced during a given period of time within the borders of the US.

For discussion of Real vs Nominal GDP, see GDP Deflator and inflation.

Measurement

The measurement of GDP is based on a fundamental identity for an economy, which is true by the rules of National Accounting. (similar to double accounting).

Fundamental Identity for an Economy

Value of total final domestic production ≡ Total expenditures on final domestic goods ≡ Total income paid to factors used in domestic production

Three obvious ways of measuring GDP:

  • Value Added Approach: Add up value of final outputs from domestic rms and the government.
  • Expenditure Approach: Add up final-use expenditures by domestic households (consumption - C), domestic firms (investment - I), the government (G) and foreigners (EX) and subtract off the expenditures by domestic agents on foreign goods (IM).
  • Income Approach: Add up incomes from factors used in domestic production: wages/salaries/benefits, interest income, rental income, corporate profits and proprietary income, indirect business taxes.

Why three approaches?

  • They lead to the same result after all (come from identities).
  • Value added approach: in which industries was the pie produced?
  • Expenditure approach: who ate the pie?
  • Income approach: What kind of production factors were rewarded while producing the pie?

Value Added Approach

  • Intermediate goods are goods that are used up in production, not just used!
  • By contrast, investment goods are final-use goods that are used in production.
  • Value-added approach avoids double counting in that it isolates the economic contribution of each production step towards the final good.
  • Special convention for government revenue: it is assumed to be equal to the government’s total costs, i.e., the government is assumed to have zero profits (not to be confused with tax revenue).
  • Sectors
    • Private sector: primary, secondary, and tertiary
    • Public sector

Expenditure Approach

  • Look at unites that absorb or use the produced final good pie.
  • Private Households: Consumption: durables, nondurables, services
  • Firms: Investment
  • Foreigners: (Net) Exports
  • Government: government expenditures on final-use goods and services plus salaries for gov employees.

Income Approach

  • Compensation for employees: wages, salaries, benefits.
  • Proprietors’ income
  • Rental income
  • Corporate profits/Dividends (investment expenditures is not subtracted from revenue, since it’s moving one asset of the firm into another)
  • Net interest
  • Indirect business taxes (sales and excise taxes paid by business) - more a convention

Treatment

Chinese Variations

  • Three categories in expenditure approach: consumption, gross capital formation, net exportation.
  • Residential consumption contributes only roughly 40% of GDP (70% in the US)

Graph View

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