Key Concepts and Summary

Key Concepts and Summary

The size of a nation’s economy is commonly expressed as its gross domestic product (GDP), which measures the value of the output of all goods and services produced within the country in a year. GDP is measured by taking the quantities of all goods and services produced, multiplying them by their prices, and summing the total. Since GDP measures what is bought and sold in the economy, it can be measured either by the sum of what is purchased in the economy or what is produced.

Demand can be divided into consumption, investment, government, exports, and imports. What is produced in the economy can be divided into durable goods, nondurable goods, services, structures, and inventories. To avoid double counting, GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production.

Glossary

depreciation

the process by which capital ages over time and therefore loses its value

double counting

a potential mistake to be avoided in measuring GDP, in which output is counted more than once as it travels through the stages of production

durable good

long-lasting good like a car or a refrigerator

final good and service

output used directly for consumption, investment, government, and trade purposes; contrast with “intermediate good”

gross domestic product (GDP)

the value of the output of all goods and services produced within a country in a year

gross national product (GNP)

includes what is produced domestically and what is produced by domestic labor and business abroad in a year

intermediate good

output provided to other businesses at an intermediate stage of production, not for final users; contrast with “final good and service”

inventory

good that has been produced, but not yet been sold

national income

includes all income earned: wages, profits, rent, and profit income

net national product (NNP)

GDP minus depreciation

nondurable good

short-lived good like food and clothing

service

product which is intangible (in contrast to goods) such as entertainment, healthcare, or education

structure

building used as residence, factory, office building, retail store, or for other purposes

trade balance

gap between exports and imports

trade deficit

exists when a nation's imports exceed its exports and is calculated as imports –exports

trade surplus

exists when a nation's exports exceed its imports and is calculated as exports – imports