Gross Domestic Product (GDP)– market value of all final goods and services produced in an economy during a given period, usually a year.

In 2009, the GDP of the U.S. was $14.26 trillion, or$46,372 per person.

3 different ways to calculate GDP:

1.) Value Added Approach

2.) Income Approach

3.) Expenditures Approach

Value Added Approach:

Add up the value of final goods and services producedin an economy, a calculation that excludes the value of intermediate goods.

Income Approach:Add up the incomes received by economic resources that produced final goods and services in an economy:

wages earned by labor

interest to those who lend their savings

rent to those who lease their land

profit earned by shareholders who are owners of the firm’s physical capital.

Expenditures Approach– add up aggregate spending on domestically produced final goods and services.

GDP = C+I+G+X-IM

C = Consumer Spending. Includes expenditures by households for:

--durables (auto, refrigerators)--non-durables (bread, milk)--services

I = Investment Spending. Includes:-- final purchases of machinery and equipment by businesses-- all construction (including residential)--- change in inventories for businesses.

An increase in inventory at the end of the year compared to the beginning of the year means goods were produced but not sold in the given year and the difference needs to be added to that year’s GDP. A decrease in inventory means goods were sold from a previous year and the amount should be subtracted from that year’s GDP.

G= Government Purchases-- government spending on finished products of businesses.-- direct purchases of resources.

X– Exports should be added to GDP because theseare goods produced in the U.S. sold to other countries.

IM – Imports should be subtracted from GDP becausethese are goods produced in other countries purchased by U.S. businesses or households.

GDP excludes:1.) intermediate goods2.) financial transactions such as:

-- public transfer payments such as social security and welfare payments-- private transfer payments such as gifts.-- security transactions (stocks and bonds)

3.) secondhand sales4.) non-market transactions (services of a homemaker, repairing your own car, growing your own vegetable garden).