A:

According to Keynesian macroeconomic theory, gross domestic product (GDP) is a way to measure a nation's production. Aggregate demand takes GDP and shows how it relates to price levels. Quantitatively, aggregate demand and GDP are exactly the same.

A Keynesian economist might point out that GDP only equals aggregate demand in long-run equilibrium. This is because short-run aggregate demand always measures total output for a given price level (not necessarily equilibrium). In most macroeconomic models, however, the price level is assumed to be equal to "one" for simplicity.

It must always be the case that an increase in aggregate demand will increase GDP since the two figures are one and the same.

Calculating Aggregate Demand and GDP

There are actually three methods for estimating GDP:

• Total value of all goods and services sold to final users
• Sum of income payments and other production costs
• The sum of all value added at each production stage

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

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

GDP and aggregate demand = total consumption spending + gross private investments + total government expenditures + net of exports – imports

You may also see the equation written this way:

GDP or AD = C + I + G + NX

Potential Issues

GDP and aggregate demand are often interpreted to mean that economic growth is driven by the consumption of wealth and not its production. In other words, it disguises the structure and relative efficiency of production underneath total expenditures.

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.

RELATED FAQS
1. What is GDP and Why Is It So Important To Investors?

The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. What does ... Read Answer >>
2. How does the stock market affect gross domestic product (GDP)?

Find out how the stock market affects gross domestic product (GDP) through two different channels: financial conditions and ... Read Answer >>
3. How can I use the rule of 70 to estimate a country's GDP growth?

Find out about the rule of 70, what it is used for and how to use it to determine the number of years a country's GDP takes ... Read Answer >>
4. How does the United States government measure economic growth?

Find out how the Bureau of Labor Statistics and the Bureau of Economic Analysis measure economic growth in the United States ... Read Answer >>
5. Why does inflation increase with GDP growth?

Examine the relationship between inflation and GDP, learn why GDP growth leads to higher prices and understand the effects ... Read Answer >>
Related Articles
1. Insights

How Is the GDP of India Calculated?

India is a front-runner among developing economies. Investopedia explains how India calculates its GDP, an indicator of economic health and performance.
2. Investing

Something Gross in GDP

GDP is used to gauge the strength of the economy, but what is it actually measuring?

Investors that understand and utilize the U.S. GDP report have a significant advantage over those that don't.
4. Insights

Deadly Flaws in Major Market Indicators

These indicators give investors and experts some data to work with, but they're far from perfect.
5. Insights

Healthiest And Safest European Economies

Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
6. Insights

One Reason Jobs Shrink: Superstar Companies

Are superstar companies that dominate their industries but employ relatively few workers to blame for labor’s falling share of GDP?
7. Insights

U.S. Second Quarter GDP Disappoints

The first reading of U.S. second-quarter GDP showed the economy grew at 1.2%, much slower than expected.
8. Insights

U.S. GDP Better than Expected in Fourth Quarter

U.S. GDP growth for the fourth quarter came in at a 1.0% seasonally adjusted annual rate, according to the Commerce Department's second estimate, issued Friday morning.
9. Insights

Does High GDP Mean Economic Prosperity?

Find out how GDP is the typical indicator used to measure a country's economic health, what it fails to reveal, and how GPI can help.
RELATED TERMS
1. Expenditure Method

The expenditure method is a method for determining GDP that totals ...
2. Stock Market Capitalization To GDP Ratio

The stock market capitalization to GDP ratio is used to determine ...
3. Aggregate Supply

Aggregate supply is the total supply of goods and services produced ...
4. Per Capita GDP

Per capita GDP measures a country's output per person, and is ...
5. Macroeconomics

Macroeconomics is the study of how the aggregate economy behaves. ...
6. Aggregate Function

An aggregate function includes values grouped together to form ...