Gross domestic product (GDP) is a way to measure a nation's production or the value of goods and services produced in an economy. Aggregate demand takes GDP and shows how it relates to price levels.

Quantitatively, aggregate demand and GDP are the same. They can be calculated using the same formula, and they rise and fall together.

Calculating Aggregate Demand and GDP

In general macroeconomic terms, both GDP and aggregate demand share the same equation:

﻿\begin{aligned} & GDP \text{ or } AD = C + I + G + (X - M)\\ &\textbf{where:}\\ &C=\text{Consumer spending on goods and services}\\ &I=\text{Investment spending on business capital goods}\\ &G=\text{Government spending on public goods and services}\\ &X=\text{Exports}\\ &M=\text{Imports}\\ \end{aligned}﻿

There are three methods for estimating GDP:

• Measuring the total value of all goods and services sold to final users
• Adding together income payments and other production costs
• The sum of all value added at each production stage

Conceptually, all of these measurements are tracking the same thing. Some differences can arise based on data sources, timing and mathematical techniques used.

Additionally, GDP does not take into consideration the nature of what, where, and how goods are created. For example, it does not distinguish producing $100,000 worth of toenail clippers versus$100,000 worth of computers. In this way, it's a somewhat unreliable gauge of real wealth or the standard of living.