What’s in This Chapter?

Gross Domestic Product measures the value of 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.

This unit discusses the difference between real GDP and nominal GDP. Nominal GDP data includes price changes (it is calculated by multiplying prices times quantities of final products). So nominal GDP could rise merely because we have had inflation. Real GDP adjusts for price fluctuations and looks at production (quantity) changes only. Therefore, real GDP is more meaningful if we want to look at the economic health of a country.

Knowing real GDP is important to a country, because it can provide a signal that its policies are effective (if it is increasing) or not effective (if it is decreasing). Households, businesses, investors and foreign countries also study GDP in order to make better decisions and plan for the future.

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 necessarily mean that everyone in the country is happy. Other factors beyond production play a role. The last section in this unit touches on “Gross National Happiness” and focuses on the relationship between GDP growth and quality of living.