Macroeconomics

1. Explain what GDP is (be sure to include a description of the components) and how it is measured. Why are countries interested in measuring their GDP? (5 Points)

--Answer below:

GDP stands for Gross Domestic Product and is defined as “the market value of the final goods and services produced in the economy within some time period, usually one year” (Ayers and Collinage, 2005, p 116). GDP is determined by the sum of consumption spending by households, the gross investment by the private sector, the government consumption and investment spending on goods and services and the net exports (Ayers et al.). Consumption spending is the “purchasing by households [and] makes up the majority of GDP spending” (Ayers et al., p 116). Investment is “spending now in order to increase output or productivity later [and] includes spending on capital, new housing, and changes in business inventories” (Ayers et al., p 117). Gross investment is “the total amount of investment” (Ayers et al., p 117), net investment is “the gross investment minus depreciation” (Ayers et al., p 117), and net domestic product is the “gross domestic product minus depreciation” (Ayers et al., p 117).

Countries are interested in measuring their GDP because this data is relied upon by policymakers in their designing and improving of new economic policies, “and help achieve the macro goals of economic growth, full employment and low inflation” (Ayers et al., p 115). By measuring the annual change in GDP, the real GDP measures the countries economic growth and a rise in real GDP indicates that the country’s output grew.

Resources:

Ayers, R, & Collinage, R. (2005). Macroeconomics. Upper Saddle River, New Jersey: Pearson Custom Publishing.