GDP

The definition of GDP is the output of goods and services produced by labor domestically. GDP measures two things: income and expenditure. It can measure these two things at once because income = expenditure in the whole economy. Why? Every transaction has a buyer and a seller. Every dollar spent by the buyer is a dollar earned by the seller so this dollar counts toward both income and expenditure.The flow chart of GDP shows how money and products always go back and forth between households and firms. Remember, income always equals expenditure.

GDP is comprehensive yet it excludes illegal (illegal drugs) and non-market products (washing dishes at home). GDP measures only the final goods (for example, a wooden table will be measured yet the value of intermediate goods like the lumber it made of will not). However, GDP measures intermediate goods as inventory investment if they enter the inventory to be used or sold later. GDP measures both intangibles (services) and tangibles. GDP is domestic regardless of nationality of the labor (if a Chinese works in America, his labor is in U.S. GDP). GDP is an annual measure published quarterly and seasonally adjusted (so holiday season GDP won't be significantly higher).

Personal income is the income of households and non-business sector. Gross National Product measures the products of nationals (U.S. GNP includes Americans abroad and excludes foreigners in U.S). Net National Product is the GDP minus depreciation. Disposable income is the income of households and non-businesses left after obligations to government satisfied. National income is NNP minus indirect business tax plus subsidies.

What is in GDP? Assuming Y is the GDP,
Y = C + I + G + NX
C = Consumption by households on goods/services
I = Investment on capital and inventories (housing purchase is investment, not consumption)
G = Government spending
NX = Exports - Imports
Each dollar of expenditure must be in one of the four categories. When is foreign good is bought, GDP is not affected because C increases while NX decreases. Transfer payments such as social security payments are not counted, in this case, toward government spending because no goods or services are exchanged.

Economists want a GDP value that is not influenced by the changes of prices over the years. So they use real GDP which is valued at a constant price of a base year. For example if base year is 2000 and we want to compute the real GDP in 2009, we would use quantity output in 2009 but prices in 2000. On the other hand, nominal GDP uses current prices, which in this case would be prices in 2009.

From real and nominal GDP, we can calculate the GDP deflator, which measures the current price levels in comparison to base year price levels.

GDP deflator = Nominal GDP / Real GDP x 100%

Note GDP deflator is always 100 for base year. GDP deflator reflects the changes of prices not quantities. Two quarters of falling real GDP is a signal of recession. Since people want higher income and expenditure, GDP per person is a good measure of individual's and society's well-being, right? In part this is true because higher GDP leads to people's higher ability to obtain what they want to make their lives better. Yet, higher GDP also might directly lead to less leisure time for laborers and worse environment for the community. These losses would offset the gains of GDP. GDP also does not measure services outside of the market such as good activities with families and volunteer work, which all make our society better. GDP does not tell us how income is distributed. A society with $5000 GDP with 100 people getting $50 income is surely much better than a society with same $5000 GDP with 1 person getting all $5000. There is a positive correlation between GDP and life expectancy, and between GDP and literacy, showing that high GDP does contribute to higher standard of living.