[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

GROSS DOMESTIC PRODUCT
The output of the economy consists of millions of different goods and services. We
could report how much of each good or service the economy produced. This would
yield a list that might include 1,362,478 hammers, 473,562,382 potatoes, 256,346 heart
operations, and so forth. Such a list might be useful for some purposes, but it would
not provide us with the information we want. If the following year the number of
hammers produced goes up by 5 percent, the potato crop yield goes down by 2 percent,
and the number of heart operations performed rises by 7 percent, has the
economy’s total output gone up or down? And by how much?
We need a single number that summarizes the output of the economy. But how
do we add up hammers, potatoes, heart operations, and the millions of other products
produced in the economy? We do this by totaling the money value of all the final
goods and services produced. By money value, we mean the dollar value of output.
By final goods and services, we mean those goods and services sold for final usage
and not those used to make other products. Since the money value of hammer production
and the money value of heart operations are in the same units (dollars), we
can add them together. The money value of final output is called the gross domestic
product, or GDP. It is the standard measure of the value of the output in an
economy. It sums up the total money value of the final goods and services produced
within a nation’s borders during a given time period, usually a year. It makes no difference
whether the production takes place in the private or public sector, or whether
the goods and services are purchased by households, the government, or the
foreign sector. 1
Wrap-Up
GROSS DOMESTIC PRODUCT
The total money value of all final goods and services produced for the marketplace
within a nation’s borders during a given period of time (usually a year).
Table 22.1 illustrates the calculation of GDP for a simple economy that produces
just two goods, personal computers (PCs) and compact discs (CDs). The table shows
the number of PCs and CDs produced in two different years, and the average prices
at which they were sold. GDP in year 1 is found by multiplying the quantities of each
good sold in year 1 by its price in year 1. This gives the money value of PC and CD production.
Adding the resulting money values together gives us GDP for this economy.
Using the data in the table, we calculate GDP to be $2,550 million in year 1 and
$2,985 million in year 2. GDP grew by 17 percent—100($2,985–$2,550)/$2,550—from
year 1 to year 2.
1 We use prices not only because they are a convenient way of making comparisons but also because they reflect
how consumers value different goods. If the price of an orange is twice that of an apple, it means an orange is
worth twice as much (at the margin) as an apple.
486 ∂ CHAPTER 22 MEASURING OUTPUT AND UNEMPLOYMENT