Chapter 4

Adding Up Gross Domestic Product

IN THIS CHAPTER

Understanding the measurement of GDP

Discovering the components of GDP

Seeing how GDP is related to living standards

Thinking about inequality

Macroeconomists love talking about gross domestic product (GDP) as much as sci-fi fans love discussing Star Trek, TV chefs the benefits of organic turnips, and Donald Trump the size of his hands. When economists examine a country’s economy, GDP is probably the first thing they look at — and for good reason. It provides a convenient snapshot of the total amount of economic activity taking place in a country. More precisely, it reveals the value of everything an economy produces in one year.

The total production idea is key. If the economy produced just one good, say oil or sugar, total production would be easy to measure. It might be 3 billion barrels of oil per year, or 40 million metric tons of sugar. Of course, a vast economy the size of the U.S. produces thousands of different goods, not just one. So, how can we measure this total?

The answer is “we pretend.” Or, in macroeconomics jargon, we assume. In particular, we pretend that the economy does produce just one good. It’s not oil or sugar per se — it’s simply called GDP. The thing about this pretend GDP good that is really special is that it has an incredible range of uses. You can take a chunk of GDP and mold it into transportation services, or into manufactured goods, or health services, or food, or shelter, or clothing. ...

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