Chapter 3: Measuring Economic Performance
1. Gross Domestic Product (GDP)
● Definition: GDP is the total market value of all final goods and services produced
within a country’s borders during a specific time period (usually annually or quarterly).
2. Components of GDP (Expenditure Approach)
Formula:
GDP = C + I + G + (X - M)
● C – Consumption: Household spending on goods and services.
● I – Investment: Business spending on capital goods and inventories.
● G – Government Spending: Expenditures on goods/services (excluding transfers like
Social Security).
● X – Exports: Goods produced domestically and sold abroad.
● M – Imports: Goods produced abroad and purchased domestically.
(X - M) is Net Exports.
3. Types of GDP
● Nominal GDP: Measured in current prices; not adjusted for inflation.
● Real GDP: Adjusted for inflation; reflects actual output growth.
● GDP per capita: Real GDP divided by population; a measure of average income.
, 4. What GDP Does and Doesn’t Include
✅ Includes:
● Final goods/services
● Legal market transactions
● Government spending on goods/services
❌ Excludes:
● Intermediate goods
● Used goods
● Financial assets (stocks, bonds)
● Underground economy
● Household production (e.g., unpaid labor)
5. Limitations of GDP
● Doesn’t measure income inequality
● Doesn’t account for environmental degradation
● Doesn’t reflect non-market activities
● Doesn’t measure happiness or well-being
1. Gross Domestic Product (GDP)
● Definition: GDP is the total market value of all final goods and services produced
within a country’s borders during a specific time period (usually annually or quarterly).
2. Components of GDP (Expenditure Approach)
Formula:
GDP = C + I + G + (X - M)
● C – Consumption: Household spending on goods and services.
● I – Investment: Business spending on capital goods and inventories.
● G – Government Spending: Expenditures on goods/services (excluding transfers like
Social Security).
● X – Exports: Goods produced domestically and sold abroad.
● M – Imports: Goods produced abroad and purchased domestically.
(X - M) is Net Exports.
3. Types of GDP
● Nominal GDP: Measured in current prices; not adjusted for inflation.
● Real GDP: Adjusted for inflation; reflects actual output growth.
● GDP per capita: Real GDP divided by population; a measure of average income.
, 4. What GDP Does and Doesn’t Include
✅ Includes:
● Final goods/services
● Legal market transactions
● Government spending on goods/services
❌ Excludes:
● Intermediate goods
● Used goods
● Financial assets (stocks, bonds)
● Underground economy
● Household production (e.g., unpaid labor)
5. Limitations of GDP
● Doesn’t measure income inequality
● Doesn’t account for environmental degradation
● Doesn’t reflect non-market activities
● Doesn’t measure happiness or well-being
