KEY POINTS:
1. Because every transaction has a buyer and a seller, the total expenditure in the economy
must equal the total income in the economy.
2. Gross domestic product (GDP) measures an economy’s total expenditure on newly produced
goods and services and the total income earned from the production of these goods and
services. More precisely, GDP is the market value of all final goods and services produced
within a country in a given period of time.
3. GDP is divided among four components of expenditure: consumption, investment,
government purchases, and net exports. Consumption includes spending on goods and
services by households, with the exception of purchases of new housing. Investment
includes spending on new equipment and structures, including households’ purchases of new
housing. Government purchases include spending on goods and services by local, state, and
federal governments. Net exports equal the value of goods and services produced
domestically and sold abroad (exports) minus the value of goods and services produced
abroad and sold domestically (imports).
4. Nominal GDP uses current prices to value the economy’s production of goods and services.
Real GDP uses constant base-year prices to value the economy’s production of goods and
services. The GDP deflator? calculated from the ratio of nominal to real GDP? measures the
level of prices in the economy.