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101 Concepts for the Level I Exam

Concept 22: Gross Domestic Product (GDP)


Gross domestic product refers to the market value of all final goods and services produced in a country over a specific time period, usually one year; government transfers and goods/services without market value are not included.

There are two approaches to calculate GDP:

  • The income approach computes GDP as the total income earned by households, businesses and the government in the country during a time period.
  • The expenditure approach
    • Can be computed through the sum-of-value-added approach where GDP is calculated by summing the additions to value created at each stage of production & distribution
    • Can be computed through the value-of-final-output approach where GDP is calculated by summing the values of all final goods and services produced during the period

The expenditures approach can also be stated as:

GDP = C + I + G + (X – M)

where:

C = consumption spending,

I = business investments (includes capital equipment and inventories),

G = government purchases,

X = exports,

M = imports

Theoretically, the GDP derived from the two methods should match. Practically, there are some discrepancies due to measurement issues.