Part II: Macroeconomics
Gross Domestic Product
Gross Domestic Product (GDP)is the primary method used by the U.S. Bureau of Economic Analysis to measure the
economy’s performance. GDP consists of the total value of all final goods and services produced on a nation’s soil in a
year. For example, Ford Motor Company in Detroit is factored into the United States’ GDP; Toyota Motor Corp. in
Dallas is also considered a part of our GDP. However, a Ford factory in Japan would not be considered in our GDP
because the goods are not produced on U.S. soil.
GDP is a monetary measure that allows us to compare relative values of goods and services. It enables us to gauge pro-
ductivity based on the sheer value of a good or service. If an economy produces one car and two boats in year 1, and
two cars and zero boats in year 2, GDP allows us to see which year was productive based on the monetary value of the
boats and cars.
The key to understanding GDP is knowing the difference between intermediateand finalgoods. Intermediate goods
are used to create final goods. Rubber, wood, and steel could all be used as intermediate goods used to manufacture a
final good. The reason we have this distinction between intermediate and final goods is because economists want to
avoid what’s called double-counting. If we were to count steel as part of GDP and later counted the car that the steel
went into as GDP, we would be double-counting, or overestimating the value of the steel. This is precisely the reason
why we count all finalgoods rather than intermediate goods.
GDP Exclusions
Economists exclude some transactions in the economy because they have nothing to do with the creation of final goods.
Purely financial transactions, such as buying or selling of stock and private and public transfer payments, are not
counted in a nation’s GDP.
Public transfer payments are payments that the government makes directly to households. Social security, welfare, and
veterans payments are all public transfer payments. Private transfer payments are monetary gifts that produce no output.
Secondhand sales are excluded from GDP because they do not contribute to current production. If you sold your motor-
cycle that was made in 1976, it would not be included in this year’s GDP because the sale would not monetarily con-
tribute to this year’s output.
Two Approaches to GDP
Economists use two approaches when looking at GDP. First, the income approachcalculates GDP by examining all
the money spent on final goods and services in the United States. The income approach considers four categories:
■ Wages to employees:Accounts for the largest share of national income.
■ Rents:Includes the income received by firms and households for the supply of property resources.
■ Interest:Includes the interest households receive on savings accounts, certificate of deposit (CD) accounts, and
corporate bonds. It also includes the money or fee firms pay for use of capital.
■ Profits:Includes the profits made by both individuals and corporations.The second strategy, the expenditures approach,calculates GDP by adding all the spending on goods and services that
has taken place in a single year:
C + I + G + X = GDP expendituresThe expenditure approach looks at four categories:
■ Personal consumption (C): Consists of all expenditures by households on durable and nondurable goods.
■ Gross investment (I):Includes the money spent on all purchases of machinery by businesses, construction of
capital, and changes in inventories.