GDP: The entire economic output of a given country.
Real GDP: GDP that has been adjusted for changes in prices.
Nominal GDP: The value of GDP in current dollars.
Two items not included in GDP:
- All the inputs that make up an item (i.e: only the finished hamburger is counted in GDP. The meat, vegetables, etc that go into it do not count).
- GDP only includes reported market transactions. If a good is produced, but not sold, then it does not count (example: the labor of a housewife).
GDP formula: Y = C + I + G + (X – M)
C = Consumer spending.
I = Investment spending (investments by firms in equipment as well as money spent on housing / residential investment)
G = Government spending.
X = exports.
M = Imports.
Leakage: Income within an economy that is not immediately spent on goods and services. Leakage occurs when income is saved rather than spent (money is withheld from the economy), Government taxes, and imports.
Injections: Additions to the circular flow of income. This includes Investment by businesses and individuals, Government spending (not including transfers of money), and exports.
Equations:
- GDP: Y = C + I + G + (X – M)
- Exports and imports in an economy: X – M = Y – C – I – G
- Leakages and Injections: S + T + M = G + I + X
(Savings + Taxes + Imports) = (Govt. spending + Investments + Exports)
- Trade imbalance in terms of inputs and outputs: X – M = S – I + T – G
(general rule: Add the leakage and subtract the injections)
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