# Gross Domestic Product (GDP) > [!summary] Definition of (US) GDP > > Dollar (or market) value of all final use output (goods and services) produced during a given period of time within the borders of the US. For discussion of Real vs Nominal GDP, see [[gdp-deflator|GDP Deflator]] and [[inflation]]. ## Measurement The measurement of GDP is based on a *fundamental identity* for an economy, which is true by the rules of [[national-accounting|National Accounting]]. (similar to [[double-accounting|double accounting]]). > [!important] Fundamental Identity for an Economy > >Value of total final domestic production ≡ Total expenditures on final domestic goods ≡ Total income paid to factors used in domestic production Three obvious ways of measuring GDP: - **Value Added Approach:** Add up value of final outputs from domestic rms and the government. - **Expenditure Approach:** Add up final-use expenditures by domestic households (consumption - C), domestic firms (investment - I), the government (G) and foreigners (EX) and subtract off the expenditures by domestic agents on foreign goods (IM). - **Income Approach:** Add up incomes from factors used in domestic production: wages/salaries/benefits, interest income, rental income, corporate profits and proprietary income, indirect business taxes. Why three approaches? - They lead to the same result after all (come from identities). - **Value added approach:** in which industries was the pie produced? - **Expenditure approach:** who ate the pie? - **Income approach:** What kind of production factors were rewarded while producing the pie? ### Value Added Approach - *Intermediate goods* are goods that are **used up** in production, not just used! - By contrast, *investment goods* are final-use goods that are used in production. - Value-added approach avoids double counting in that it isolates the economic contribution of each production step towards the final good. - Special convention for government revenue: it is assumed to be equal to the government's total costs, i.e., the government is assumed to have zero profits (not to be confused with *tax* revenue). - Sectors - Private sector: primary, secondary, and tertiary - Public sector ### Expenditure Approach - Look at unites that absorb or use the produced final good pie. - Private Households: Consumption: durables, nondurables, services - Firms: Investment - Foreigners: (Net) Exports - Government: government expenditures on final-use goods and services plus salaries for gov employees. ### Income Approach - Compensation for employees: wages, salaries, benefits. - Proprietors' income - Rental income - Corporate profits/Dividends (investment expenditures is not subtracted from revenue, since it's moving one asset of the firm into another) - Net interest - Indirect business taxes (sales and excise taxes paid by business) - more a convention ## Treatment - Separating the trend: [[hp-filter|HP Filter]]. ## Chinese Variations - Three categories in expenditure approach: consumption, gross capital formation, net exportation. - Residential consumption contributes only roughly 40% of GDP (70% in the US)