Definitions

Aggregate output

The national income and product accounts were developed at the end of WWII to measure aggregate output
The main measure of aggregate output is “Gross Domestic Product” or GDP

GDP is the value of final goods & services produces in the economy during a given period
GDP is the sum of value added in the economy during a given period.
- Value added from Steel: $100; Value added from Car: $200-$100=$100; Sum of Value added = $200
GDP is the sum of incomes in the economy during a given period.
- Wages = $80 + $70 = $150; Profit = $20 + $30 = $50; Sum of incomes = $200

Nominal GDP is the sum of quantities of final goods produced times their current price
- The production of most goods increases over time
- THe price of most goods increases over time
We want to isolate the first reason to measure how aggregate output grows over time
Read GDP (or just GDP) is the sum of quantities of final goods times constant (not current) prices
- Or when we remove inflation component from Nominal GDP we get Real GDP
We denote nominal GDP by “$Y_t” and real GDP by “Y_t”
There are two reasons nominal GDP is growing
1. Economy is being productive by producing more goods
2. Prices are going up due to inflation

Goods: Goods are things that are tangible
Services: Services is not tangible, they’re benefits that you receive from the tasks that someone else operates on or for you.