GDP

Standing for Gross Domestic Product, GDP measures the market value of all final goods and services produced within a country in a given period. Note that illegal transactions are exempt from GDP.

Types

• Real GDP - Calculation of GDP that is adjusted for inflation
• Nominal GDP - GDP given in current prices without adjustment for inflation
• Actual GDP - Measurement of a country’s economy at the current moment
• Potential GDP - Calculation of a country’s economy under ideal conditions

Measuring GDP

There are three ways to measure GDP: value-added approach, income approach, and expenditures approach.

Value-added Approach

Approach that involves adding all of the values at various stages of production.

Income Approach

Approach that involves adding all the income.

$$ \text{GDP} = \text{Wages + Interest + Rent + Profit} $$

Expenditures Approach

Approach that involves adding all spending on final goods, which are goods that are purchased by consumers, businesses, the government, or other countries in their final form for their intended final use.

$$ \text{GDP} = \text{Consumption + Investment + Government} + (\text{Export} - \text{Import}) $$

Circular Flow Diagram

The circular flow diagram illustrates the equivalence of the income approach and expenditures approach to calculating national income.