Have you ever wondered how a nation’s wealth is measured? How do economists, politicians, and governments know if their economies are improving or decreasing? One method macroeconomists use to measure a countries economy is called measuring the Gross Domestic Product (GDP). According to Mankiw 2015, a GDP is the “market value of all final goods and services produced within a country in a given time period” (p. 198). What are the components of GDP and how GDP is measured will be the discussion of this essay.
Components of the GDP
The gross domestic product (Y) is made up of four (4) different categories: (C) Consumption, (I) Investment, (G) Government Spending, and (NX) Net Export. The GDP is calculated using the following formula:
Y = C + I + G + NX
Consumption: is the spending on goods and services made by households. Purchases of new homes are not included in consumption.
Investment: are the goods that are purchased to be used to produce more goods and services in the future.
Government Purchases: includes spending on the goods and services by the federal, state, and local governments. Certain government programs such as social security and welfare are not considered a government purchase.
Net Exports: as the name implies it is an equation of exports – imports or stated the total of domestically produced goods purchased by foreign countries (exports) minus the total domestic purchase of foreign goods (imports).
Examples of GDP
When countries are evaluating the spending of their limited resources, economists will use the equation GDP = Consumption + Investment + Government Spending + Net Exports, as discussed above. Consumption is purchases such as new automobiles, gasoline f...
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...is common, it is not necessarily an indicator of a country’s well-being or happiness. For example, if a country created a policy that said everyone must work Monday through Saturday (an extra day of the normal work week) the GDP most likely would increase; however, would the country be better off? Probably not, because leisure time is a very important facet of ones well-being and happiness, by adding an extra day into the work week would most likely increase the GDP economically, but hurt the country overall because the work-force would be over-worked and unhappy. Economists spend much time each month and quarter (three months) gathering data to calculate the GDP of the country. Although difficult to calculate, an accurate GDP is very important because policy makers and politicians use the GDP to make economic decisions and create policies that affect everyone.
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