Measuring The GDP

We know that in an economy, GDP is the monetary value of all final goods and services produced. For example, let's say Country B only produces bananas and backrubs.

Figure %: Goods and Services Produced in Country B

In year 1 they produce 5 bananas that are worth $1 each and 5 backrubs that are worth $6 each. The GDP for the country in this year equals (quantity of bananas X price of bananas) + (quantity of backrubs X price of backrubs) or (5 X $1) + (5 X $6) = $35. As more goods and services are produced, the equation lengthens. In general, GDP = (quantity of A X price of A) + (quantity of B X price of B) + (quantity of whatever X price of whatever) for every good and service produced within the country. In the real world, the market values of many goods and services must be calculated to determine GDP. While the total output of GDP is important, the breakdown of this output into the large structures of the economy can often be just as important. In general, macroeconomists use a standard set of categories to breakdown an economy into its major constituent parts; in these instances, GDP is the sum of consumer spending, investment, government purchases, and net exports, as represented by the equation:

Y = C + I + G + NX

Because in this equation Y captures every segment of the national economy, Y represents both GDP and the national income. This because when money changes hands, it is expenditure for one party and income for the other, and Y, capturing all these values, thus represents the net of the entire economy. Let's briefly examine each of the components of GDP.
• Consumer spending, C, is the sum of expenditures by households
• on durable goods, nondurable goods, and services. Examples include clothing, food, and health care.
• Investment, I, is the sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing.
• Government spending, G, is the sum of expenditures by all government bodies on goods and services. Examples include naval ships and salaries to government employees.
• Net exports, NX, equals the difference between spending on domestic goods by foreigners and spending on foreign goods by domestic residents. In other words, net exports describes the difference between exports and imports.