Real Gross Domestic Product (GDP)
Connections


Connections to Key Topics with Additional Resources

Topic Connections and Additional Resources
Production Possibilities Frontiers

An economy is operating on its production possibilities frontier (PPF) when it is using all of its resources (land, labor, and capital) efficiently. An economy is operating inside its PPF during a recession when some of these resources are idle. Economic growth is represented as outward movement on a PPF diagram. For example, business investment that creates more capital can lead to economic growth and an outward shift in the PPF.

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Income Distribution and Poverty

Growth in real per-capita GDP (real GDP divided by population) is considered to be an important indicator of improvement in material standard of living. Yet while real per-capita GDP has been growing in the U.S., the distribution of income in the U.S. is one of the most unequal of all industrially developed countries. Rapid advancements in technology that contribute to U.S. economic growth also cause people who lack technical training to fall further behind.

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Economics and the Environment

The relationship between economic growth and the environment is complex. For example, due to our high material standard of living, the U.S. emits 24 times as much carbon dioxide per person as India. Yet our higher income also allows us to afford cleaner technology: The U.S. emits less than one-third as much carbon dioxide per dollar equivalent of GDP as India.

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Productivity and Growth

Economic growth refers to increases in real GDP. Improvements in productivity represent a key source of future economic growth. This is why countries that have relatively high rates of business investment tend to have faster rates of economic growth.

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Unemployment, Employment, and Inflation

The business cycle helps us understand the relationship between real GDP, unemployment, and inflation. During peak periods of the business cycle when the economy is experiencing rapid growth in real GDP, employment will increase, and unemployment decrease, as businesses seek workers to produce a higher output. If real GDP grows too quickly, however, it can cause price inflation as firms are forced to bid against one another for increasingly scarce workers. In contrast during trough periods of the business cycle the economy is experiencing declines in real GDP, and unemployment rates are high.

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Output, Income, and the Price Level

If Gross Domestic Product (GDP) rises, we may not know whether this is due to an increase in output or an increase in the price level. We can find out by computing real GDP, which adjusts for inflation by holding prices constant over time. Increases in real GDP reflect increases in output, or economic growth.

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Taxes, Spending and Deficits

Increases in real GDP produce higher tax receipts because business and personal income rises as real GDP rises. Moreover, welfare and social service expenses tend to decline when real GDP rises because more people are able to find work and achieve independence. Thus governments are more likely to have a budget surplus during economically good times, while the opposite is true during recessions.

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Aggregate Demand/ Aggregate Supply

The level of real GDP in an economy at any point in time is found at the macroeconomic equilibrium where aggregate demand equals aggregate supply. Economic growth can occur in the short run when aggregate demand and/or aggregate supply increases. In the long run, however, the level of real GDP is determined by the long-run aggregate supply curve, which is vertical at the full-employment output level.

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International Trade Since GDP measures domestically produced goods and services, it includes exports sold to purchasers outside the U.S., but does not include imports produced outside the U.S. In recent years the value of U.S. imports has exceeded that of U.S. exports. Levels of international trade continue to grow as technology and communications have permitted firms to globalize their production and sales.

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Developing and Transitional Economies Most developing countries were colonies exploited by a major European power, are relatively less industrialized, and have considerably lower real per-capita GDP than the U.S., Canada, Japan, and various European countries. Transitional economies also have relatively low real per-capita GDP, and are those formerly centrally planned countries that are adopting a more capitalist economic system. In order for developing and transitional economies to experience Western-style material standards of living they must foster very rapid rates of economic growth.

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