What’s in This Chapter?
Gross Domestic Product measures how many final goods and services a country or region produces. The measure has its flaws, but nevertheless does a reasonably good job indicating how much a country’s economic activity changes from quarter to quarter and from year to year.
If production increases, it is usually an indication that the economy is doing well and that unemployment is decreasing and incomes are rising. Knowing GDP is important to a country, because it can provide a signal that its policies are effective (if GDP is increasing) or not effective (if GDP is decreasing). Households, businesses, investors and foreign countries also study GDP in order to make better decisions and plan for the future.
This unit also discusses the difference between real GDP and nominal GDP. Nominal GDP data includes production quantities and price changes. However, real GDP is the more meaningful statistic for policy-making decisions because it adjusts for price fluctuations and targets production (quantity) changes only.
Does real GDP measure happiness or standard of living? It helps if a country is productive and employment is high. However, a high GDP doesn’t mean that everyone in the country is happy. Other factors beyond production play a role. The last section in this unit focuses on the relationship between GDP growth and the environment, as well as GDP growth and leisure time.