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 Measuring National Output and National... Summary

1. How do we know how much the economy produces? When you hear about GDP on the news, what does it mean?

Aggregate output is the total amount of goods and services produced by an economy. Gross domestic product (GDP) is the principal measure of aggregate output.

2. If you buy a new Dodge Viper, does it count toward this year's GDP? What about a new Porsche Boxster? How about a '57 Chevy?

GDP is the value of final goods and services produced within an economy (including the value of the new Dodge Viper). GDP excludes products made abroad and sold in the domestic economy (such as the Porsche Boxter), used goods (such as the '57 Chevy), as well as paper transactions, such as the sales of stocks and bonds.

3. Until fairly recently, the output of the economy was referred to as GNP rather than GDP. How do they differ?

Gross national product (GNP) measures the output of goods and services by domestically owned factors of production. For example, the value of a Honda Accord produced at a plant in Tennessee would not be included in U.S. GNP, but the value of a car produced at a plant in Mexico owned by Chevrolet would be counted. GDP, on the other hand, counts the value of goods and services produced within the domestic economy. The Honda Accord produced in Tennessee would be included in U.S. GDP, but the value of the cars produced at the Chevrolet plant in Mexico would not be counted.

4. One way to calculate GDP is to add up all expenditures on all new final goods and services. What are the four main categories of expenditures that are included?

The four main categories of expenditures are personal consumption expenditures, gross private investment, government purchases of goods and services, and net exports.

5. One person's spending is another person's income. Can the incomes received by people in the economy be added up to measure GDP? Would any adjustments need to be made?

Adding the incomes to participants in the economy is another way to calculate GDP. National income consists of compensation to employees, proprietors' income, corporate profits, net interest, and rental income. To go from national income to GDP, adjustments need to be made for depreciation, some taxes and subsidies, and income flows to and from the rest of the world.

6. If GDP goes up, does that mean we are better off? What if inflation goes up, but the actual output of the economy doesn't? How can we tell the difference between nominal and real GDP?

Nominal GDP uses current year prices to calculate the value of goods and services. If inflation goes up, but the actual aggregate output remains constant, nominal GDP will increase. Real GDP corrects for inflation by using a weighted average of different years' prices to value goods and services.

7. How does GDP relate to our standard of living? What are some criticisms raised by environmentalists about the concept of GDP?

Several aspects of economic activity are excluded from GDP, such as household production, the underground economy, and leisure time. Many environmentalists criticize GDP because it does not deduct environmental degradation from its estimate of economic well being.

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