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Gross Domestic Product (GDP)

resulting values. They give us current dollar or nominal
Product and prices GDP, that is, the value of output measured in prices that
existed when the output was produced.
Year 1 Year 2 The GDP has risen 12 percent from the first year to
Goods Output Prices Output Prices the second, but this increase is only partially due to addi-
Balls 10 balls $50 per ball 10 balls $55 per ball tional output ($1,120 – $1,000 = $120). Part of the
Bats 10 bats $25 per bat 12 bats $25 per bat increase is due to changes in prices. To get a measure that
Gloves 10 gloves $25 per glove 9 gloves $30 per glove
contains only the increase in output, we can multiply the
outputs of the second year by the prices of the first year.
Table 1 When we add up these values, they total $1,025. This
number implies that if only the quantities of output had
changed and not the prices, GDP would have increased
ities (air and water pollution) also increase. The environ- only from $1,000 to $1,025, a rise of only 2.5 percent.
ment becomes degraded and negatively affects the quality This $1,025 is real GDP.
of life. The GDP measures goods and services traded, but
the negative externalities are not included in this count- SEE ALSO Macroeconomics/Microeconomics
ing. However, these negative externalities increase the
GDP. For example, when the automobile industry wants BIBLIOGRAPHY
to produce more cars, the smoke that is emitted from the Eggert, James (1997). What is Economics? (4th ed.). Mountain
smokestacks includes carcinogens that may make people View, CA: Mayfield Publishing Company.
in the area sick. A person who gets sick from the emitted Mansfield, Edwin, and Behravesh, Nariman (2005). Economics
smoke may go to the doctor. The doctor may prescribe U$A (7th ed.). New York: W.W. Norton & Co.
medication. The cost of the visit to the doctor and the cost Mings, Turley, and Marlin, Matthew (2000). Study of Economics:
of the medication are added to the total value of the GDP. Principles, Concepts, & Applications (6th ed.). Guilford, CT:
Dushkin/McGraw-Hill.
Table 1 contains output and price statistics for a sim-
Wilson, J. Holton, and Clark, J. R. (1996). Economics. Cincin-
ple economy that produces only three goods. In the first
nati, OH: South Western Educational Pub.
year, the value of output, or GDP, is $1,000; in the second
year, the GDP is $1,120. These numbers are obtained by
multiplying quantities by prices and then summing the Gregory P. Valentine

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 359