Gross Domestic Product (GDP)

What do you think “Gross Domestic Product” measures? Let’s break it down…

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Gross – rough/overall (think gross pay)

Domestic – home country (the opposite of foreign)

Product – the noun for “produce”

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So what do you think it measures?

GDP is the market value of all final goods and services produced in a country in a year

Basically, it keeps track of how much countries produce (what we make or do).

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We track this by looking at what gets bought.

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This means changes in prices (from inflation for example) and �re-sales have to be factored out.

It only counts final goods and services bought by the end-user. It doesn’t count things that are re-sold or used to make other things.

This is so things aren’t counted twice. For example, when you buy a cake, the cost of the sugar is part of the price and counted when you buy it. If they also counted when the bakery bought the sugar to put into the cake, the sugar would end up getting counted twice. Of course when you buy sugar for your home, it counts because then you’re the final user – unless you’re selling cakes.

GDP is concerned with where goods and services are produced. It doesn’t matter who owns the company.

So a Toyota factory in Mississippi counts towards U.S. GDP, and a Ford factory in India counts towards India’s GDP.

Economists often measure GDP by adding up the money spent on four major categories of goods and services:

• Consumption (C): Spending by households on goods and services. Includes spending on things such as cars, foods, and visits to the dentist. Makes up two-thirds of GDP spending.

• Investment (I): Spending by businesses on machinery, factories, equipment, tools, and construction of new buildings. Also, new housing construction.

Based on this, the formula for GDP is:

GDP = C + I + G + X - M

Everything adds to it, except imports which are subtracted.

• Government (G): Spending by all levels of government on goods and services. Includes spending on the military, schools, and highways.

• Net Exports (X-M): Imports are counted in GDP, but they are subtracted from the total. Exports are added.

What’s not counted in GDP?

• Intermediate goods (goods used to make other goods, ex. - plastic for computers)

• Transfer payments (Soc. Security, stocks, bonds, etc. – nothing is being produced)

• Used stuff (counted already when it was first sold)

What’s not counted in GDP?

• Under the table activities (drugs, babysitting, anything without a paper trail)

• Unpaid work – housework, care-giving, volunteer work

• Debt – GDP counts what gets produced by counting what gets bought, it doesn’t look at where the money came from

Other important things to know about GDP…

Aside from not counting debt, quality of life issues are not considered. �Ex. - environment, wealth distribution, social costs, mental health, etc. GDP growth at the expense of these other considerations may not be sustainable in the long run.

Important Terms:

• Real GDP – adjusted for inflation*.
• Nominal GDP – constant prices, not adjusted for inflation*.
• Per Capita GDP – GDP per person

*we use the price of things to keep track of GDP (production), but prices change (inflation). If staplers used to cost $5 and now cost $10, and the U.S. produced $1 million worth of staplers. You’d have to know the current cost of staplers to figure out how many were produced.

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Real GDP factors out the effects of price changes, and nominal GDP is the raw numbers before figuring out the effects of inflation.

In 2000, in trillions of U.S. dollars, the U.S. GDP was:

GDP = C + I + G + ( X - M )

$10.04 = $6.81 + $1.87 + $1.75 + ($1.13 - $1.52)

What do you think it was in 2024?

Around $29 Trillion!!

List of Countries by Nominal GDP

List of Countries by Per Capita Nominal GDP

Click on the links below to see the most current ranking of countries by GDP...