21 Gross Domestic Product
Measuring the Size of the Economy: Gross Domestic Product
Macroeconomics is an empirical subject, meaning that it is verifiable by observation or experience rather than theory. Given this, the first step toward understanding macroeconomic concepts is to measure the economy. (6)
How large is the U.S. economy? The size of a nation’s overall economy is typically measured by its Gross Domestic Product (GDP) , which involves counting up the production of millions of different goods and services — houses, cars, smart phones, computers, steel, oranges, college educations, and all other new goods and services produced in the current year — and summing them into a total dollar value.
GDP measures the market value of the goods, services, and structures produced by the nation’s economy in a particular period. GDP is one of the most comprehensive and closely watched economic statistics; It is used by the White House and Congress to prepare the Federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street as an indicator of economic activity, and by the business community to prepare forecasts of economic performance that provide the basis for production, investment, and employment planning. While GDP is used as an indicator of economic activity, it is not a measure of well-being (for example, it does not account for rates of poverty, crime, or literacy). (7)
GDP is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time. According to the Bureau of Economic Analysis (BEA), in 2015 the U.S. GDP totaled about $18 trillion in current dollars, and about $16.4 trillion in chained 2009 dollars, which represents the largest level of GDP among all countries in the world. (8)
Each of the market transactions that enter into GDP must involve both a buyer and a seller. The GDP of an economy can be measured either by the total dollar value of what is purchased in the economy (the Income Approach), or by the total dollar value of what is produced (the Expenditure Approach). (6)
Definition of the GDP: Breaking Things Down
At its core, the gross domestic product (GDP) measures how much output a country’s economy has produced in a stipulated period of time. Because adding up different goods and services, measured in different measurement units, is not a practical way to measure production in the economy, economists rely on the market value of goods and services produced. Thus, GDP represents the market value (expressed in a country’s currency, such as the dollar) of all final goods and services legally produced within a country in a given time period, typically one year.
In a nutshell, such measurement involves the calculation of market value , which for each unique good or service produced consists of multiplying its quantity with the market price, followed by adding everything up into an overall dollar figure. In practice, the process is much more complicated a