GDP and growth
Gross domestic product is the headline number for an economy: the market value of all final goods and services produced within a country in a given period.
The expenditure approach
The most common way to build GDP adds up who spends: GDP = C + I + G + NX.
- C — Consumption: household spending on goods and services, usually the largest slice.
- I — Investment: business spending on equipment and structures, plus new housing and inventory changes.
- G — Government: government purchases of goods and services (not transfer payments like pensions).
- NX — Net exports: exports minus imports.
Real vs nominal
Nominal GDP uses current prices, so it rises when either output or prices rise. Real GDP strips out price changes by holding prices at a base year, so it isolates the change in actual output. When you hear "the economy grew 3%," that's real GDP growth.
What GDP leaves out
GDP is powerful but incomplete. It excludes unpaid work and household production, ignores the distribution of income, doesn't count environmental damage or resource depletion, and says nothing directly about wellbeing. It's a measure of production, not of welfare — a distinction exam questions love.
Common exam traps
- Counting intermediate goods (only final goods count, to avoid double-counting).
- Putting government transfer payments into G.
- Confusing a rise in nominal GDP from inflation with real growth.
Assemble GDP from its components and see how each part moves the total.
Open the GDP lab →