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GDP—The Measure of National Output
(cont.)
• Gross domestic product (GDP)—
measures the dollar value of all final
goods, services, and structures produced
within a country’s borders during a oneyear period.
• The most important measure of a nation’s
economic performance and economic
health.
Estimating Total Annual Output
GDP—The Measure of National Output
(cont.)
• Items excluded from GDP & Examples
– Intermediate products
– Secondhand sales
– Nonmarket transactions
– Underground economy
Estimating Total Annual Output
GDP—The Measure of National Output
(cont.)
• GDP has limitations.
– GDP tells us nothing about composition
of output.
– GDP tells little about the impact of
production on quality of life.
– Some GDP is produced to control
activities with little utility.
Economic Sectors and Circular Flows
(cont.)
• The largest sector in the economy is the
household or consumer.
Economic Sectors and Circular Flows
(cont.)
• Business or investment sector
– Proprietorships, partnerships, and
corporations
Economic Sectors and Circular Flows
(cont.)
• Government or public sector
• Foreign sector
The Output—Expenditure Model (cont.)
• The circular flow can be represented by
the output-expenditure model.
– GDP = C + I + G + (X – M)
The Output—Expenditure Model (cont.)
• Consumers spend income on goods and
services used by households.
• Income that is not spent appears as
personal saving and borrowed by the
business and government sectors.
The Output—Expenditure Model (cont.)
• Investment sector spends income on labor,
factories, equipment, inventories, and
other investment goods.
• Government sector spends income on
national defense, income security, roads, etc.
• Foreign sector buys U.S. goods that make up
our GDP.
• Foreign sector purchases are called
net exports of goods and services.
Economic Sectors and Circular Flows
(cont.)
• Income generated by production flows to
businesses, government, and consumer
sectors.
Circular Flow of Economic Activity
GNP—The Measure of National Income
Gross national product (GNP)
(cont.)
– The dollar value of all final goods,
services, and structures produced in a
one-year period with labor and property
owned by a country’s residents.
=GDP
+ payments received from outside the
country
– payments made to all foreign owned
businesses within the country