4.0 Introduction

Learning Objectives

At the end of this chapter, learners will be able to:

  • Define gross domestic product and its four major spending components.
  • Illustrate the various flows using the circular flow model.
  • Distinguish between measuring GDP as the sum of the values of final goods and services and as the sum of values added at each stage of production.
  • Distinguish between Real and Nominal gross domestic products
  • Distinguish between gross domestic product and gross national product.

An economy produces a mind-boggling array of goods and services every year. For example, Domino’s Pizza produces hundreds of millions of pizzas. Alimentation Couche-Tard Inc. (ATD-A.TO) is based in Quebec and operates convenience stores across Canada and many foreign locations. A small logging company in Ontario produces a couple million board feet of lumber. A university hockey team draws over half a million fans to its home games. A pediatric nurse in Toronto delivers hundreds of babies and cares for several hundred additional patients. A list of all the goods and services an economy produces in any year would be endless.

So—what is the year we are looking at? We would not get far trying to wade through a list of all the goods and services produced that year. It is helpful to have a single number that measures the economy’s total output: GDP.

How large is the Canadian economy? Economists typically measure the size of a nation’s overall economy by its gross domestic product (GDP), which is the value of all final goods and services produced within a country in a given year. Measuring GDP involves counting the production of millions of different goods and services—smartphones, cars, music downloads, computers, steel, bananas, college educations, and banking and real estate services. So all kinds of new goods and services that a country produced in the current year—and summing them into a total dollar value. This task is straightforward: take the quantity of everything produced, multiply it by the price at which each product is sold, and add up the total. In 2022, the World Bank reported the GDP of Canada to be US $1.894 trillion.

Each market transaction that enters into GDP must involve both a buyer and a seller. We can measure an economy’s GDP by the total dollar value of what consumers purchase or the total dollar value of what the country produces. 


Attribution

6.1 Measuring Total Output” from Principles of Macroeconomics by the University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

License

Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Principles of Macroeconomics Copyright © 2023 by Sharmistha Nag is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.