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AGGREGATE MARKET EQUILIBRIUM: The state of equilibrium that exists in the aggregate market when real aggregate expenditures are equal to real production with no imbalances to induce changes in the price level or real production. In other words, the opposing forces of aggregate demand (the buyers) and aggregate supply (the sellers) exactly offset each other. The four macroeconomic sector (household, business, government, and foreign) buyers purchase all of the real production that they seek at the existing price level and business-sector producers sell all of the real production that they have at the existing price level. The aggregate market equilibrium actually comes in two forms: (1) long-run equilibrium, in which all three aggregated markets (product, financial, and resource) are in equilibrium and (2) short-run equilibrium, in which the product and financial markets are in equilibrium, but the resource markets are not.

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Gross domestic product (GDP) is the total market value of all goods and services produced within the political boundaries of an economy during a given period of time, usually one year. GDP is intended to measure the nation's production of wants-and-needs satisfying goods and services. While it provides an indication of how far the economy has come on the long road to battling the ever-present scarcity problem, it is NOT a direct measure of the nation's welfare or well-being. GDP is certainly a big component of the well-being of the country, but not the ONLY component.
While, gross domestic product provides an indication of the economy's well-being, it does NOT capture several factors that are deemed important. The key factors are the exclusion of productive activity, the inclusion of negative products, the quality of the environment, and the distribution of production and income

Excluded Production

Gross domestic product seeks to measure ALL current economic production, but falls short. It misses a substantial amount of household production that has no market transactions, such as cooking, cleaning, and home repairs. To the extent that people provide their own wants-and-needs satisfying production, GDP falls short of being an accurate indicator of the nation's welfare.

An important part of this household production involves leisure activities. To the extent that people work less at measured productive activities (that is, wage-paying jobs) that generate the income used to buy wants-and-needs satisfying production, and spend more time enjoying wants-and-needs satisfying leisure activities, then GDP is not an accurate indicator of the nation's welfare.

Excluded production is extremely important to modern economies, like that in the United States. People spend only about 40 hours (out of 168 total hours) working at the productive activities that go into GDP. Even if the 50 to 60 hours a week spent sleeping are ignored, a good 70 hours remains for leisurely, household production activities. In other words, workers could be generating almost twice as much unmeasured satisfaction as that from measured production. The unmeasured satisfaction generated by retirees, children, and others who do not spend any time working is also worth noting. They are likely to be spending 100 hours or more a week generating unmeasured satisfaction.

Included Negative Production

One of the failings of GDP is that it includes ALL "production," whether or not the production contributes to welfare or provides satisfaction. In fact, some measured production could actual reduce welfare. Suppose, for example, that Duncan Thurly buys a hot fudge sundae, production which is included in GDP. However, he spills this on the floor mat of his car during a sharp turn trying to avoid a high-speed chase between bank robbers and police. Even though it is included in GDP, this hot fudge sundae does not provide satisfaction. GDP is $2 greater, but Duncan's satisfaction does not change.

In fact, Duncan may have to pay someone to clean hot fudge stains from his floor mats. This also boosts GDP without an increase in his satisfaction. And when the bank robbers crash into the ice cream parlor, demolishing the store, injuring 10 people and killing 2, then GDP expands further. Repairs made to the store add to GDP. Hospital expenses for the injured people add to GDP. Even the funerals for the two deceased souls add to GDP. But these have not increased satisfaction.

The economy undertakes a lot of production that does not enhance welfare, and which, at best, only corrects welfare-reducing problems. Examples include police protection, fire protection, national defense, health care, road repairs, and home repairs.

Environmental Quality

This notion of negative production can be taken a step farther by considering the impact that economic production has on environmental quality. Environmental quality is often (not always, but often) diminished with increased economic production. The reduction in environmental quality, which can reduce welfare, is seldom included in the measured production of GDP. To the extent that it is included, it is much like police and fire protection, in which an increase in "environmental quality maintenance production" to correct environmental quality problems, shows up as an increase in GDP.

Income Distribution

Lastly, GDP is an aggregate measure for the economy. It does not indicate who receives the production and the income generated by the production. If Winston Smythe Kennsington III, an extremely wealthy person, receives the entire production of U.S. GDP, and the remaining population of the country receive nothing (that is, diddly squat), then the country's overall well-being is not likely to be very high. Winston's welfare is great (until he meets his demise at the hands of an angry mob of peasants), but the welfare for everyone else is pretty dismal. In contrast, GDP shared more equally by all is prone to generate a higher overall well-being for the nation.


Recommended Citation:

GROSS DOMESTIC PRODUCT, WELFARE, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: July 24, 2024].

Check Out These Related Terms...

     | gross domestic product, ins and outs | gross domestic product, expenditures | gross domestic product, income | net domestic product | national income | personal income | disposable income | gross national product | real gross domestic product |

Or For A Little Background...

     | gross domestic product | macroeconomic goals | current production | National Income and Product Accounts |

And For Further Study...

     | macroeconomic problems | macroeconomic theories | macroeconomic sectors | circular flow | business cycles | business cycle indicators | stabilization policies | Bureau of Economic Analysis | National Bureau of Economic Research | unemployment | inflation |

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