GROSS DOMESTIC PRODUCT

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Gross domestic product (GDP)
-the total market value of all final goods and services produced within a country's borders within a given year

Gross national product (GNP)
-a measure of what citizens produce and whether they produce these items within a country's borders


There are four sections of GDP, to find the GDP, use this equation:
GDP = C + Ig + G + Xn

"C" stands for personal consumption expenditures, which are finished goods or services. More than half of the economy is spent on this part
"Ig" stands for gross private domestic investment, less than 20% of the economy is spent on this part. There are four categories in this segment:
  • factory equipment maintenance
  • new factory equipment
  • construction of housing
  • unsold inventories or products built in a year
"G" stands for government purchases of goods and services. 20% of the economy is spent on this section.

"Xn" stands for net export, which is found using the formula: Xn = exports - imports. Less than 1% of the economy is spent on this segment.


There are also factors not included when GDP is calculated. These factors include:

Used or Secondhand Goods
  • not included because to avoid double or multiple counting
  • ex: buying a car manufactured in 2011 in 2019
Gifts or Transfer Payments
  • ex: a gift would be giving money to someone for their birthday
  • transfer payments happen when you give money from one person to the next
  • ex. of private transfer: a scholarship
  • ex. of public transfer Social Security or welfare
Stocks or Bonds

Unreported Business Activities
  • ex: tips
Illegal or Underground Activities
  • ex: black market or drugs
Non-Market Activities
  • ex: babysitting
Intermediate Goods
  • are similar to used or secondhand goods, but these are not included to avoid double or multiple counting
  • ex: parts of a car
To find GDP, we can find it using two different methods:

Expenditure approach 
- adds up all spending on final goods and services produced in a year 
-the formula to find it is:
GDP = C + Ig + G + Xn

Income approach 
-adds up all of the income that came from selling all final goods and services produced in a year 
-the formula to find it is:
GDP = w + r + i + p + statistical adjustments

- "w" stands for wages
-"r" stands for rent
- "i" stands for interest
- "p" stands for profits

here are more formulas to find the different parts of GDP:

Budget Surplus/Deficit 
- government purchases of goods and services + transfer payments - government tax and fee collection
  • a positive number is a deficit
  • a negative number is a surplus

Trade Surplus/Deficit
- exports - imports
  • a positive number is a surplus
  • a negative number is a deficit

National Income 
- compensation of employees + rental income + proprietor's income + corporate profits
- GDP - indirect business tax - net foreign factor payment - depreciation
  • the first equation is the same as (wages + rent + interest + profits)
  • compensation of employees also means wages and salaries
  • depreciation also is consumption of fixed capital

Disposable Personal Income 
- national income - personal household taxes + government transfer payments

Gross National Product (GNP) 
-  GDP + national foreign factor payment

Net National Product (NNP) 
- GNP - depreciation

Net Domestic Product (NDP) 
- GDP - depreciation

Gross Private Domestic Investment (Ig) 
- net private domestic investment + depreciation

two types of GDP:
 real GDP and nominal GDP.

Real GDP 
-the value of output produced in base-year prices
-can increase from year to year but only if output increases
-real GDP is adjusted for inflation
-equation is price x quantity

Nominal GDP
-the value of output produced in the current prices 
-can increase from year to year if the output or prices increase
-equation is price x quantity

here are some things to remember about real and nominal GDP :) :
  • in the base-year, the current prices are equal to the constant price
  • in years AFTER the base-year, nominal GDP will pass real GDP
  • in years BEFORE the base-year, real GDP will pass nominal GDP
Price index 
-measures inflation by tracking the changes in price of a market basket of goods when compared the base-year

Consumer Price Index (CPI) 
-measures the cost of a market basket of goods of a normal American family
-the equation is:
price from year 2 - price from year 1/price from year 1 x 100

GDP deflator 
-price index used to adjust from nominal to real GDP 
-the equation is:
nominal GDP/real GDP x 100
  • in the base-year, GDP deflator will equal 100
  • the years AFTER the base-year, GDP deflator is greater than 100
  • the years BEFORE the base-year, GDP deflator is less than 100
Inflation rate equation is:
new year - old year/old year x 100
*****Use the numbers calculated from using GDP deflator or CPI*****

If you still don't understand, here are some vids 2 help :) :


Income and expenditure approach of GDP: 


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