4 Gross Domestic Product
4.1 Measuring the size of an economy: Gross domestic product
From: OpenStax Macroeconomics (http://cnx.org/content/col12190/1.4), Chapter 6.1
Macroeconomics is an empirical subject, so the first step toward understanding it is to measure the economy.
How large is the U.S. economy? Economists typically measure the size of a nation’s overall economy by its gross domestic product (GDP), which is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services that a country produced in the current year—and summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total. In 2019, the U.S. GDP totaled $21.4 trillion, the largest GDP in the world.
Each of the market transactions that enter into GDP must involve both a buyer and a seller. We can measure an economy’s GDP either by the total dollar value of what consumers purchase in the economy, or by the total dollar value of what the country produces.
GDP Measured by Components of Demand
Who buys all of this production? We can divide this demand into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services (government), and spending on net exports (net exports). Table 4.1 shows how these four components added up to the GDP in 2016. Figure 4.1 shows the levels of consumption, investment, and government purchases over time, expressed as a percentage of GDP, while Figure 4.2 shows the levels of exports and imports as a percentage of GDP over time. A few patterns about each of these components are worth noticing.
| Component | Spending in Trillions of USD | Pct. of Total |
| Consumption | $16.7 | 70.5 |
| Investment | $3.8 | 16.0 |
| Government | $3.8 | 16.0 |
| Net Exports | -$0.6 | -2.5 |
| Exports | $2.5 | 10.5 |
| Imports | -$3.1 | -13.0 |
| Total GDP | $23.7 | 100.0 |
Consumption expenditure by households is the largest component of GDP, accounting for about two-thirds of the GDP in any year. This tells us that consumers’ spending decisions are a major driver of the economy. However, consumer spending is a gentle elephant: when viewed over time, it does not jump around too much, and has increased modestly from about 60% of GDP in the 1960s and 1970s.
Investment expenditure refers to purchases of physical plant and equipment, primarily by businesses. If Starbucks builds a new store, or Amazon buys robots, they count these expenditures under business investment. Investment demand is far smaller than consumption demand, typically accounting for only about 15–18% of GDP, but it is very important for the economy because this is where jobs are created. However, it fluct