Gross Domestic Product (GDP)
What is Gross Domestic Product (GDP)?
Gross Domestic Product is the total market value of all final goods and services produced within a country in a given period of time.
It measures the economic output of a nation and is used to gauge economic health. Only final goods are included to avoid double-counting intermediate goods. GDP includes production by both domestic and foreign entities within the country’s borders.
Gross Domestic Product (GDP): a worked example
Using the expenditure approach, suppose a country records consumption of $700 billion, investment of $200 billion, government purchases of $250 billion, exports of $120 billion and imports of $170 billion in one year. Net exports are 120 − 170 = −$50 billion, so GDP = 700 + 200 + 250 − 50 = $1,100 billion, or $1.1 trillion. A $5 loaf of bread baked from $2 of flour adds $5 to that total rather than $7, because the flour is an intermediate good whose value is already inside the price of the bread.
The mistake students make with gross domestic product (gdp)
Students see the minus sign in front of imports and conclude that buying foreign goods shrinks GDP. Imports are subtracted only as a bookkeeping correction: an imported laptop was already added into consumption when the household bought it, and because GDP counts only production inside the country's borders, the same amount has to be taken back out. The subtraction cancels the earlier addition rather than reducing domestic output.
Gross Domestic Product (GDP) questions
What is the formula for GDP?
The expenditure formula for GDP is GDP = C + I + G + (X − M), where C is household consumption, I is business investment, G is government purchases of goods and services, X is exports and M is imports. Each component measures spending on final goods and services produced within the country during the period.
Is the sale of a used car included in GDP?
The sale of a used car is not counted in GDP, because the car was already counted as production in the year it was built and GDP measures only current production. The dealer's commission or service fee does count, since that service is produced in the current period.
Are Social Security payments counted in government spending in GDP?
Transfer payments such as Social Security and unemployment benefits are excluded from the G component of GDP, because the government receives no good or service in exchange for them. They enter GDP later, as consumption, if and when the recipient spends the money on goods and services.
Related terms
Common comparisons
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