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By the end of this section, you will be able to:

  • Identify the components of GDP on the demand side and on the supply side
  • Evaluate how gross domestic product (GDP) is measured
  • Contrast and calculate GDP, net exports, and net national product

Macroeconomics is an empirical subject, so the first step toward understanding it is to measure the economy.

How large is the U.S. economy? The size of a nation’s overall economy is typically measured by its gross domestic product (GDP)    , which is the value of all final goods and services produced within a country in a given year. The measurement of GDP involves counting up the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services produced in the current year—and summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total. In 2014, the U.S. GDP totaled $17.4 trillion, the largest GDP in the world.

Each of the market transactions that enter into GDP must involve both a buyer and a seller. The GDP of an economy can be measured either by the total dollar value of what is purchased in the economy, or by the total dollar value of what is produced. There is even a third way, as we will explain later.

Gdp measured by components of demand

Who buys all of this production? This demand    can be divided into four main parts: consumer spending (consumption), business spending (investment), government spending on goods and services, and spending on net exports. (See the following Clear It Up feature to understand what is meant by investment.) [link] shows how these four components added up to the GDP in 2014. [link] (a) shows the levels of consumption, investment, and government purchases over time, expressed as a percentage of GDP, while [link] (b) shows the levels of exports and imports as a percentage of GDP over time. A few patterns about each of these components are worth noticing. [link] shows the components of GDP from the demand side. [link] provides a visual of the percentages.

(Source: http://bea.gov/iTable/index_nipa.cfm)
Components of u.s. gdp in 2014: from the demand side
Components of GDP on the Demand Side (in trillions of dollars) Percentage of Total
Consumption $11.9 68.4%
Investment $2.9 16.7%
Government $3.2 18.4%
Exports $2.3 13.2%
Imports –$2.9 –16.7%
Total GDP $17.4 100%

Percentage of components of u.s. gdp on the demand side

This pie chart shows the percentage of components of U.S. GDP on the demand side as follows: Consumption: 68.4% Investment: 16.7% Government: 18.4% Exports: 13.2% Imports: −16.7%
Consumption makes up over half of the demand side components of the GDP. (Source: http://bea.gov/iTable/index_nipa.cfm)

What is meant by the word “investment”?

What do economists mean by investment, or business spending? In calculating GDP, investment does not refer to the purchase of stocks and bonds or the trading of financial assets. It refers to the purchase of new capital goods, that is, new commercial real estate (such as buildings, factories, and stores) and equipment, residential housing construction, and inventories. Inventories that are produced this year are included in this year’s GDP—even if they have not yet sold. From the accountant’s perspective, it is as if the firm invested in its own inventories. Business investment in 2014 was almost $3 trillion, according to the Bureau of Economic Analysis.

Questions & Answers

Leo Robinson's definition
Adejimi Reply
how is equilibrium defined in financial markets?
Babakura Reply
the concept of it
DALOM
Country A has export sales 20 billion, government purchases 1000billion, business investment is 50 billion, imports are 40billion, and consumption spending is 2000billin. What is the dollar value of GDP ?
Habtamu Reply
what is determination of national income?
Waqar Reply
economic growth
Rukaiya
stock of capital
Rukaiya
we're RBI keep money with them
Anil
Y =C+l
Favour
evaluate the success affirmative action as one of south Africa's redress method
Tebatso Reply
what is market equilibrium
explorer Reply
it is a situation in which the supply of an item is exactly equal to it dd .
Ssmith
inder wat condition shld a firm stop production in both short n lungrun ?
Ssmith
what is 2nd degree price discrimination?
Ssmith
what is quantity
Tettey
what is quantity2
Deji Reply
An indefinite amount of something.
explorer
what is demand
Kaman Reply
in ordinary sense demand means desire
Khalid
demand in economics means both willingness as well as the ability to purchase a commodity by paying a price an also its actuall purchase
Khalid
what is absolute advantage
Khalid
demand refers to the various quantity of goods and services that consumers are willing and able to purchase at a particular period of time all other things been equal
Dela
The amount of a good or service that consumers are willing to buy at a particular price.
explorer
what is cost pull inflation?
oru
what is utility
oru
what is cost pull inflation?
oru
demand is economic principle referring to a consumer's desire and willingness to pay a price for a specific or service..
Babakura
utility is the among of certisfaction driving from using a comundity
Anas
pull cost of inflation hight population unemployment to some of The country members poor government system
Anas
what is a buffer scheme
Lukong
state the second law of demand and supply
Ahmadou Reply
state the law of diminishing marginal utility
Ahmadou
dt know WATS the answer
Rukundo
mention and explain two Bank I financial institutions and two non baking financial institutions
Onah Reply
wat is demand pull inflation
Tony Reply
Demand-pull inflation is asserted to arise when aggregate demandin an economy outpaces aggregate supply. It involvesinflation rising as real gross domestic product rises and unemployment falls, as the economy moves along the Phillips curve.
kevin
Perfectly elastic demand
Abubakar Reply
this is a form of demand where goods are demanded at a constant price
Rukundo
what inelastic demanding
Koire
demand of any good demanded more after a certain period. if a commodity prices may high and scarcity of that resources.
Anil
cannot demand more
Anil
what is cross-elasticity of demand
Miles Reply
cross elasticity of demand is an economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in other good
Mallekha
this is responsiveness quantity demanded keeping other factors constant
Rukundo
what economic growth
Rukundo Reply
conditions of perfect market
NdzAlama Reply
CONDITIONS OF PERFECT MARKET: 1. Perfect competition(PC): no increasing returns, many buyers and sellers, all are price takers, not prices makers. 2. Perfect Information (PI): buyers and sellers know all they need to know about what they are buying and selling to make the right decisions.
Mallekha
3. Complete Markets(CM): no externalities or public goods, no transactions costs, "thick" markets.
Mallekha
nice contributor
Mohammed
A numerous downsized market that does not meet standards.
LaTasha
A Perfect Market is a numerous downsized market that does not meet standards.
LaTasha
what is a market
Ahmadou
is place where buyers and sellers met together for the purpose of buying and selling of good and services
Babakura

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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