Mastering Macroeconomics: GDP, Keynesian Multiplier & Inflation — Interactive

What Is GDP?

GDP (Gross Domestic Product) is the market value of all final goods and services produced within a country during a specific period.

The Three Approaches to Measuring GDP

All three methods yield the same result — this is the equivalence of the three approaches.

1. Expenditure Approach

GDP = C + I + G + (X - M)

C: Consumption / I: Investment / G: Government spending / X-M: Net exports

2. Income Approach

GDP = Wages + Interest + Rent + Profit Sum of all factor income earned in production

3. Production Approach

GDP = Sum of value added at each production stage Only value added is counted to avoid double-counting

Nominal GDP vs. Real GDP

Measure	Meaning
Nominal GDP	GDP measured at current-year prices
Real GDP	GDP measured at base-year prices
GDP Deflator	(Nominal GDP / Real GDP) × 100

Real GDP is the true measure of economic growth. You must distinguish whether nominal GDP growth is driven by price increases or actual production growth.

The Keynesian Multiplier

The multiplier shows how much GDP expands from an initial change in spending.

Multiplier Formula

k = 1 / (1 - MPC)

If MPC = 0.8: k = 1 / (1 - 0.8) = 5

A $100 billion increase in government spending raises GDP by$ 500 billion.

How the Ripple Effect Works

Government spends $100 → businesses earn$ 100 → with MPC = 0.8, they spend $80 → those recipients spend$ 64 → and so on. The infinite series sums to $500.