Measuring the Size of the Economy: Gross Domestic Product

GDP Measured by What is Produced

Everything that we purchase somebody must first produce. Table breaks down what a country produces into five categories: durable goods, nondurable goods, services, structures, and the change in inventories. Before going into detail about these categories, notice that total GDP measured according to what is produced is exactly the same as the GDP measured by looking at the five components of demand. Figure provides a visual representation of this information.

Components of GDP on the Supply Side (in trillions of dollars) Percentage of Total
Goods
Durable goods $3.0 16.1%
Nondurable goods $2.5 13.4%
Services $11.6 62.4%
Structures $1.5 8.1%
Change in inventories $0.0 0.0%
Total GDP $18.6 100%
Components of U.S. GDP on the Production Side, 2016 (Source: http://bea.gov/iTable/index_nipa.cfm)
The pie chart shows that services take up almost half of the chart, followed by durable goods, nondurable goods, structures, and change in inventories.
Percentage of Components of GDP on the Production Side Services make up over 60 percent of the production side components of GDP in the United States.

Since every market transaction must have both a buyer and a seller, GDP must be the same whether measured by what is demanded or by what is produced. Figure shows these components of what is produced, expressed as a percentage of GDP, since 1960.

The graph shows that since 1960, structures have mostly remained around 10%, but dipped to 7.7% in 2014, and durable goods have mostly remained around 20%, but dipped in 2014 to 16.8%. The graph also shows that services have steadily increased from less than 30% in 1960 to over 61.9%  in 2014. In contrast, nondurable goods have steadily decreased from roughly 40% in 1960 to around 13.7% in 2014.
Types of Production Services are the largest single component of total supply, representing over 60 percent of GDP, up from about 45 perent in the early 1960s. Durable and nondurable goods constitute the manufacturing sector, and they have declined from 45 percent of GDP in 1960 to about 30 percent in 2016. Nondurable goods used to be larger than durable goods, but in recent years, nondurable goods have been dropping to below the share of durable goods, which is less than 20% of GDP. Structures hover around 10% of GDP. We do not show here the change in inventories, the final component of aggregate supply. It is typically less than 1% of GDP.

In thinking about what is produced in the economy, many non-economists immediately focus on solid, long-lasting goods, like cars and computers. By far the largest part of GDP, however, is services. Moreover, services have been a growing share of GDP over time. A detailed breakdown of the leading service industries would include healthcare, education, and legal and financial services. It has been decades since most of the U.S. economy involved making solid objects. Instead, the most common jobs in a modern economy involve a worker looking at pieces of paper or a computer screen; meeting with co-workers, customers, or suppliers; or making phone calls.

Even within the overall category of goods, long-lasting durable goods like cars and refrigerators are about the same share of the economy as short-lived nondurable goods like food and clothing. The category of structures includes everything from homes, to office buildings, shopping malls, and factories. Inventories is a small category that refers to the goods that one business has produced but has not yet sold to consumers, and are still sitting in warehouses and on shelves. The amount of inventories sitting on shelves tends to decline if business is better than expected, or to rise if business is worse than expected.

Another Way to Measure GDP: The National Income Approach

GDP is a measure of what is produced in a nation. The primary way GDP is estimated is with the Expenditure Approach we discussed above, but there is another way. Everything a firm produces, when sold, becomes revenues to the firm. Businesses use revenues to pay their bills: Wages and salaries for labor, interest and dividends for capital, rent for land, profit to the entrepreneur, etc. So adding up all the income produced in a year provides a second way of measuring GDP. This is why the terms GDP and national income are sometimes used interchangeably. The total value of a nation’s output is equal to the total value of a nation’s income.