Gross Domestic Product (TCI 13.1)

Gross Domestic Product

By Carole Hawke

​ When economists study a country’s economy, they can look at it from two different perspectives. They can study the economic decision making of individuals, households, and firms—the field known as microeconomics. Or, as you will do in this lesson, they can study the workings of the economy as a whole, the focus of macroeconomics. One of the first questions that scholars in the field of macroeconomics ask is, “How big is the economy?”

​ One of the first questions that scholars in the field of macroeconomics ask is, “How big is the economy?” The main measure of the size of a nation’s economy is its gross domestic product, or GDP. GDP is an economic indicator that measures a country’s total economic output. In formal terms, gross domestic product is the market value of all final goods and services produced within a country during a given period of time. A steadily growing GDP is generally considered a sign of economic health.

Multiple Choice

What does GDP stand for?

• grand domestic product

• gross domestic product

• grand dramatic production

• gross dragon production

Multiple Choice

Does a country want its GDP to go up or down?

• up

• down

​We can learn a lot about what is involved in this measurement by looking at the formal definition of gross domestic product phrase by phrase.

​ The market value . . . Our economy produces a vast variety of goods and services, everything from guitar lessons to computers. How can anyone add them all together to come up with a single measure of an economy’s output? The Bureau of Economic Analysis does so by attaching a market value to each product. Market value is the price buyers are willing to pay for a good or service in a competitive marketplace.

​ Of all final goods and services . . . GDP is based on the market price of every “final” good or service that can be legally sold in a country. A final good is any new good that is ready for use by a consumer. A box of cereal is a final good, as is a new car. Goods that are used in the production of final goods, such as the grains used to produce cereal or the steel and rubber used to manufacture cars, are known as intermediate goods. Their market value is not counted in GDP because it is already included in the market value of the final good.

Multiple Choice

Which of the following is a final good?

• the wires that go into the steering wheel of a car

• the microchip that goes into the car

• the car that your uncle buys at the dealership

• the rubber that is used to make the tires on the car

​ Produced within a country . . . To be included in GDP, goods and services must be produced within the country’s borders. The firms that produce the goods and services do not necessarily have to be American owned. Cars manufactured in the United States by the Japanese automaker Toyota, for example, are included in the United States’ GDP.

​ During a given period of time. The Bureau of Economic Analysis calculates GDP every quarter, or three-month period. Economists use the calendar year GDP to compare production from year to year or from country to country. This annual GDP includes all final goods and services produced between January 1 and December 31

Multiple Select

Pick all of the items that would be included in the GDP.

• lipstick developed and sold by Lip Bar in Detroit

• a sweater made in Bangla Desh and imported to the U.S.

• wires which will be used to make a flashlight

• a gallon of milk produced on a farm in Michigan