In this chapter, I'm going to talk about the single most important measure of a macroeconomy and that is the gross domestic product. This is a measurement that we'll be looking at repeatedly throughout the entire course

In this chapter, I'm going to talk about the single most important measure of a macroeconomy and that is the gross domestic product. This is a measurement that we'll be looking at repeatedly throughout the entire course. It is the single most common measurement that macroeconomists look at day to day, and when they try to look at the performance of an economy over time, looking over trends of year to year and decade to decade. The gross domestic product in concept measures the total amount of output within the geographic boundaries of an economy in a given period of time, typically in a year. In almost all cases with the few exceptions it measures market transactions, in other words, it measures the actual purchase of products in the economy during a particular period. I'll be referring mainly to my home economy, the United States, during a given period of time. Of course, we measure that total output both in the sum of all of the value of production in the US during the year, but we also want to look at the output per American to get a sense of the level of productivity of the economy, and measure as we'll see, of the living standards in a country on a comparative basis or in terms of changes over time. What's fascinating for me about gross domestic product is that we can look at it in three rather distinctive ways, and it's indeed measured in what we call the national income accounts in three very, very different ways. So one way, which I would say is the most natural according to this description, is the output that is produced by the different sectors of the economy. So in a given year, the farmers will produce a certain amount of income, the mines will produce a certain amount of income, the manufacturing sector will have a certain amount of production during the year, and so forth. And if you add up all those outputs valued in general at the prices for which those goods and services are sold in the marketplace, that gives one measure, in fact, the kind of definition of the gross domestic product. There's a second way that the gross domestic product can be conceived. Every time a business sells a product that it's made, it earns income. But who's really earning the income? The enterprise will pay its workers, that's part of the wage compensation that is earned in the economy, and the business will make some profit, and whoever are the owners of that business it could be shareholders or could be a sole individual owner, a sole proprietor, will earn income from the business, often corporate profits. So just as GDP can be measured from the perspective of every sector's sales of its output, you can also measure the GDP from all of the different kinds of income that are earned by the workers and the owners of the economy during that same year, and they come out to the same amount as long as one takes care of very specific technical issues to make those two conceptually the same. Now, there's a third way-also very, very important for our understanding of the macro economy- and that is the uses of the output of the economy in a given year. Broadly speaking, there are only a few ways in which the output of the economy is finally utilized by households, government, businesses that are buying those products in the marketplace. One way is for consumption. We buy goods-you go to a restaurant or you go to a grocery store to buy foodstuffs-and you literally consume them. Or you go to the shop and buy a shirt or another piece of clothing and you consume them, or you buy an automobile-you don't consume it, but you do use it perhaps for 10 or 15 years-and in principle every year there's a certain amount of use value that you're getting out of that, and depending on the accounting conventions, that could be counted as the consumption of durable goods during the year. So one part of the output of the economy is used for direct final consumption, as we call it, for the direct use by typically individuals in the country to satisfy their desires or needs for food, for transport, for housing, for the other goods and services that they buy. There's another use of output in the economy. Not for the current consumption, but for the future production. Remember that one part of our economic life is to take some of our output and put it aside for the future. That's investing in the future. We build up the capital stock so that we can be more productive in the future, rather than taking the income today-a company might say we're not going to distribute our profits to our shareholders or to our individual owner, we're going to plow those profits back into a bigger factory, we're going to buy a new great piece of equipment, we're going to buy new vehicles for our production system or new drones to deliver our books to households in the coming years-that is investment. So part of the output will be directed towards the investment needs. Now we also distinguish between the consumption and investment that's made by private households and businesses and the part that is made by government so we often talk about the government consumption of output. What does government consumption of output look like? It looks like your children's school or the school you went to if it was built by the government as a public school. Governments, by the services of teachers, they provide the services of education or maybe run hospitals or build roads; building roads is a kind of government investment, providing immediate goods and services is typically classified as government consumption. This is another use of the output of the economy. There's another possibility. And that is we produce something, but we don't either consume it or use it for our investment, we sell it abroad. We sell it to somebody that wants to buy it; we export the good and from the perspective of the buyer they're importing it into their economy. That's another use of our final output. And when we consume or invest, we don't just consume and invest goods that are produced inside the United States, if we're thinking about US GDP; we also consume goods that are imported from the rest of the world. And when we look at our domestic production, we note that while our consumption of foreign goods is part of our consumption and investment, it's not part of our domestic production. So we take our total of consumption and investment and we have to subtract off our imports, so that we have what is actually produced within our country. All of this is to say three distinct ways that the same idea can be measured, and they are measured independently in those three ways and they better check out, and fortunately they do. So again one way is to do a survey of all the businesses in the country: what did you produce and sell this year? Add it up! That's the gross domestic product. Ask how much did you earn this year? to the workers, to the owners, to the landlords who rent their buildings. Add up all of that income- totally different calculation-but it also adds up to the same number. And then a third way to do it is, what did you consume or invest this year? All the things you purchased and what did you do with it? I consumed this amount of food and we bought this amount of furniture and we bought these vehicles and we build these roads and these new factories and as a company we exported this amount of goods and we subtract off what we imported from abroad because we're only interested in the part of our spending that is on our own goods, not on what is imported from abroad, and lo and behold, a third completely different approach to measuring that total output yields the same numbers. Those three perspectives are very, very important when we want to do diagnostics. Though they all come to the same conclusion, they help us to understand the structure, the changes, the shocks in the economy, the sources of inequality, the prospects for the future, by taking a different perspective.