What is the total market value of all final goods and services produced in a year net income from abroad?

Learning Objectives

• Explain gross domestic product (GDP) and what is counted as a final good or service

Macroeconomics is an empirical subject, meaning that it is verifiable by observation or experience rather than just theory. Given this, the first step toward understanding macroeconomic concepts is to measure the economy.

How large is the U.S. economy? The size of a nation’s overall economy is typically measured by its gross domestic product (GDP), which is the value of all final goods and services produced within a country in a given year. The measurement of GDP involves counting up the production of millions of different goods and services—smart phones, cars, music downloads, computers, steel, bananas, college educations, and all other new goods and services produced in the current year—and summing them into a total dollar value. This task is conceptually straightforward: take the quantity of everything produced, multiply it by the price at which each product sold, and add up the total. In 2016, the U.S. GDP totaled $18.6 trillion, the largest GDP in the world.

Figure 1. These packaged foods and other products in a grocery store make up just a small sampling of all the goods and services in an economy.

What are Final Goods and Services?—The Problem of Double Counting

GDP is defined as the current value of all final goods and services produced in a nation in a year. What are final goods? They are goods or services at their furthest stage of production at the end of a year. Statisticians who calculate GDP must avoid the mistake of double counting, in which output is counted more than once as it travels through the stages of production. For example, imagine what would happen if government statisticians first counted the value of tires produced by a tire manufacturer, and then counted the value of a new truck sold by an automaker that contains those tires. In this example, the value of the tires would have been counted twice-because the value of the truck already includes the value of the tires.

To avoid this problem, which would overstate the size of the economy considerably, when government statisticians compute the GDP at the end of the year, they count just the value of final goods and services in the chain of production. Intermediate goods, which are goods that are used in the production of other goods, are excluded from GDP calculations.

From the example above, government statisticians would count the value of the truck plus the value of any tires that were produced but not yet put on trucks, since at the end of the year, those tires are counted as final goods. Next year, when the tires are put on new trucks, GDP will include the value of the new trucks less the value of the tires that were counted this year. If this sounds complicated, remember the point is to only count things that get produced once.

The concept of GDP is fairly straightforward: it is just the dollar value of all final goods and services produced in the economy in a year. In our decentralized, market-oriented economy, actually calculating the more than $16 trillion-dollar U.S. GDP—along with how it is changing every few months—is a full-time job for a brigade of government statisticians.

What is counted in GDP?

• Final goods and services
• Intermediate goods that have not yet been used in final goods and services.
• Raw materials that have been produced, but not yet used in the production of intermediate or final goods.

What is not included in GDP?

• Intermediate goods that have been turned into final goods and services (e.g. tires on a new truck)
• Used goods
• Transfer payments
• Non-market activities
• Illegal goods

Notice the items that are not counted into GDP, as outlined in the list above. The sales of used goods are not included because they were produced in a previous year and are part of that year’s GDP. Transfer payments are payments by the government to individuals, such as Social Security. Transfers are not included in GDP, because they do not represent production.  Production of non-marketed goods and services—such as home production like when you clean your home—is not counted because these services are not sold in the marketplace.  By contrast, if you hire Merry Maids to clean your home, your payments do count as part of GDP, because the transaction is counted as going through the marketplace.  Finally, the entire underground economy of services paid “under the table” as well as any other illegal sales should be counted, but are not, because they are not reported in any way. In a recent study by Friedrich Schneider of Shadow Economies, the underground economy in the United States was estimated to be 6.6% of GDP, or close to $2 trillion dollars in 2013 alone.

Economists generally estimate GDP using a method called the Expenditure Approach. Let’s explore that next.

Watch this explanation of what GDP is and what is included (and not included) when it is measured. You’ll learn more details about each of these components of GDP soon.

You can view the transcript for “(Macro) Episode 20: GDP” here (opens in new window).

These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Practice until you feel comfortable doing the questions.

final goods and services: goods or services at the furthest stage of their production at the end of a year; that is, they have either been sold to consumers, or they are intermediate goods or raw materials that have not yet been used to produce final goods gross domestic product (GDP): the value of the output of all goods and services produced within a country in a year

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Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports). While GDP is the single most important indicator to capture economic activity, it falls short of providing a suitable measure of people's material well-being for which alternative indicators may be more appropriate. This indicator is based on nominal GDP (also called GDP at current prices or GDP in value) and is available in different measures: US dollars and US dollars per capita (current PPPs). All OECD countries compile their data according to the 2008 System of National Accounts (SNA). This indicator is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.

Gross national product (GNP) is an estimate of the total value of all the final products and services turned out in a given period by the means of production owned by a country's residents. GNP is commonly calculated by taking the sum of personal consumption expenditures, private domestic investment, government expenditure, net exports, and any income earned by residents from overseas investments, then subtracting income earned by foreign residents. Net exports represent the difference between what a country exports minus any imports of goods and services.

GNP is related to another important economic measure called gross domestic product (GDP), which takes into account all output produced within a country's borders regardless of who owns the means of production. GNP starts with GDP, adds residents' investment income from overseas investments, and subtracts foreign residents' investment income earned within a country.

• GNP measures the output of a country's residents regardless of the location of the actual underlying economic activity.
• Income from overseas investments by a country's residents counts in GNP, and foreign investment within a country's borders does not. This is in contrast to GDP which measures economic output and income based on location rather than nationality.
• GNP and GDP can have different values, and a large difference between a country's GNP and GDP can suggest a great deal of integration into the global economy.

GNP measures the total monetary value of the output produced by a country's residents. Therefore, any output produced by foreign residents within the country's borders must be excluded in calculations of GNP, while any output produced by the country's residents outside of its borders must be counted.

GNP does not include intermediate goods and services to avoid double-counting since they are already incorporated in the value of final goods and services.

The U.S. used GNP until 1991 as its main measure of economic activity. After that point, it started to use GDP in its place for two main reasons. First, because GDP corresponds more closely to other U.S. economic data of interest to policymakers, such as employment and industrial production, which, like GDP, measure activity in the boundaries of the U.S. and ignore nationalities. Second, the switch to GDP was to facilitate cross-country comparisons because most other countries at the time primarily used GDP.

GNP and GDP are very closely related concepts, and the main differences between them come from the fact that there may be companies owned by foreign residents that produce goods in the country, and companies owned by domestic residents that produce goods for the rest of the world and revert earned income to domestic residents.

For example, there are a number of foreign companies that produce goods and services in the United States and transfer any income earned to their foreign residents. Likewise, many U.S. corporations produce goods and services outside of the U.S. borders and earn profits for U.S. residents. If income earned by domestic corporations outside of the United States exceeds income earned within the United States by corporations owned by foreign residents, the U.S. GNP is higher than its GDP.

Calculating both GNP and GDP can produce different results in terms of total output. For example, in 2021 (according to Q3 data), U.S. GDP was $23.2 trillion, while its GNP was $23.47 trillion.

While GDP is the most widely followed measure of a country's economic activity, GNP is still worth looking at because large differences between GNP and GDP may indicate that a country is becoming more engaged in international trade, production, or financial operations. The larger the difference between a country's GNP and GDP, the greater the degree of incomes and investment activity in that country involve transnational activities such as foreign direct investment one way or another.

Gross national product is one metric for measuring a nation’s economic output. Gross national product is the value of all products and services produced by the citizens of a country both domestically, and internationally minus income earned by foreign residents. For instance, if a country had production facilities in a neighboring country and its home country, gross national product would account for both of these production outputs.

Gross national product accounts for its citizen’s productions both within and outside its borders. This figure then subtracts income earned by foreign residents within the country. By contrast, gross domestic product measures the production of goods and services made within a country’s borders by both citizens and foreign residents overall.

Consider a country that has a gross national product that exceeds its gross domestic product. This indicates that its citizens, businesses, and corporations are providing net inflows to the country through their overseas operations. Consequently, this higher gross national product may signal that a country is increasing its international financial operations, trade, or production.