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GDP

The single most important concept in macroeconomics is the gross domestic product (GDP), which measures the total value of goods and services produced in a country during a year.
GDP enables policymakers to determine whether the economy is contracting or expanding and whether a severe recession or inflation threatens.
When economists want to determine the level of economic development of a country, they look at its GDP per capita.
GDP is the name we give to the total market value of the final goods and services produced within a nation during a given year.

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GDP equals the total production of consumption and investment goods, government purchases, and net exports to other lands.
The gross domestic product (GDP) is the most comprehensive measure of a nation's total output of goods and services. It is the sum of the dollar values of consumption ( C), gross investment (/), government purchases of goods and services ( G), and net exports (X) produced within a nation during a given year.
In symbols:

GDP = C + I + G + X

Measures of National Product

GDP can be measured either as a flow of products or as a sum of earnings.
We begin by considering an oversimplified economy in which there is no government, no foreign trade, and no investment.
For the moment, our little economy produces only consumption goods, which are items that are purchased by households to satisfy their wants

Measures of National Product

Flow-of-Product Approach.
Each year the public consumes a wide variety of final goods and services: goods such as apples, computer software , and blue jeans; services such as health care and haircuts.
We include only final goods - goods ultimately bought and used by consumers. Households spend their incomes for these consumer goods, as is shown in the upper loop of Figure 20-1.
Add together all the consumption dollars spent on these final goods, and you will arrive at this simplified economy's total GDP.
The gross domestic product is defined as the total money value of the flow of final products produced by the nation.

Measures of National Product

Earnings or Income Approach
The second and equivalent way to calculate GDP is the income accounts (also called the earnings or cost approach).
Look at the lower loop in Figure 20-1. Through it flow all the costs of doing business; these costs include the wages paid to labor, the rents paid to land, the profits paid to capital, and so forth . But these business costs are also the earnings that households receive from firms.
By measuring the annual flow of these earnings or incomes, statisticians will again arrive at the GDP.
Hence, a second way to calculate GDP is as the total of factor earnings (wages, interest, rents, and profits) that are the costs of producing society's final products.

Measures of National Product

GDP, or gross domestic product, can be measured in two different ways: ( 1 ) as the flow of spending on final products, or (2) as the total costs or incomes of inputs. Both approaches yield exactly the same measure of GDP.

The Problem of Double Counting�

We defined GDP as the total production of final goods and services. A final product is one that is produced and sold for consumption or investment.
GDP excludes intermediate goods-goods that are used up to produce other goods. GDP therefore includes bread but not flour, and home computers but not computer chips.
For the flow-of-product calculation of GDP, excluding intermediate products poses no major complications.
We simply include the bread and home computers in GDP but avoid including the flour and yeast that went into the bread or the chips and plastic that went into the computers.

Value-added approach

There is an ingenious technique that resolves the problem.
To avoid double counting, we take care to include only final goods in GDP and to exclude the intermediate goods that are used up in making the final goods.
In making lower-loop earnings measurements, statisticians are very careful to include in GDP only a firm's value added.
Value added is the difference between a firm's sales and its purchases of materials and services from other firms.
By measuring the value added at each stage, taking care to subtract expenditures on the intermediate goods bought from other firms, the lower-loop earnings approach properly avoids all double counting and records wages, interest, rents, and profits exactly one time.
In other words, in calculating the GDP earnings or value added by a firm, the statistician includes all costs except for payments made to other businesses.
Hence business costs in the form of wages, salaries, interest payments, and dividends are included in value added, but purchases of wheat or steel or electricity are excluded from value added.

the major defects of�the standard GDP numbers

Gross National Product (GNP)

An alternative measure of national output, widely used until recently, is gross national product (GNP). What is the difference between GNP and GDP? GNP is the total output produced with labor or capital owned by the residents of a country, while GDP is the output produced with labor and capital located inside the country.
For example, some of the U.S. GDP is produced in Honda plants that are owned by Japanese corporations operating in the U.S. The profits from these plants are included in U.S. GDP but not in U.S. GNP because Honda is a Japanese company. Similarly, when an American economist flies to Japan to give a paid lecture on baseball economics, payment for that lecture would be included in Japanese GDP and in American GNP. For the United States, GDP is very close to GNP, but these may differ substantially for very open economies.
To summarize:
Gross national product (GNP) is the total final output produced with inputs owned by the residents of a country during a year.