Gross Domestic Product (GDP) is the total financial value of all goods and services produced in a country within a year. Equilibrium GDP is when aggregate demand and supply are equal. Changes in aggregate demand and supply affect equilibrium GDP, which changes over time.
Gross Domestic Product (GDP) is an important economic indicator used to assess the financial health of a nation as a whole. It is calculated by adding up the total financial value of all goods and services that have been produced in a country within one year. For example, the GDP for the United States (US) is more than $14 trillion United States Dollars (USD) as of 2011, although this value changes every year. Equilibrium GDP occurs when businesses within a nation produce exactly the amount of goods and services that people want to buy. In economic terms, equilibrium GDP can be defined as the level of GDP at which aggregate demand and aggregate supply are equal.
Aggregate demand represents the total amount of goods and services that people are willing and able to buy. In the United States, for example, aggregate demand equals all products and services produced in the United States that are purchased by domestic or international people. Graphically, aggregate demand is shown as a downward sloping curve, where demand is higher at low prices and lower at high prices.
Aggregate supply is the total value of goods and services produced in a country in a single year. If every resource within the country is put to work at maximum efficiency, aggregate supply and GDP will always be equal. These resources include everything from labor to equipment and natural resources. Since this type of efficiency is rare, aggregate supply tends to increase as the price level rises. This can be shown graphically as a growing line, where price and GDP increase proportionally to each other.
Graphically, equilibrium GDP can be found by locating the point where the aggregate supply and demand curves intersect. Since these values change over time, as the curves shift, equilibrium GDP also always changes. For example, aggregate supply may increase over time, even though all resources are already being used at peak efficiency. This occurs when technological advances allow companies to generate more outputs from the same amount of inputs. In real-world scenarios, most economies can increase aggregate supply and balance GDP simply by improving overall efficiency.
Changes in aggregate demand can also affect equilibrium GDP. When price levels rise, people can afford fewer products and services, leading to a decline in aggregate demand. This results in a reduction of the equilibrium GDP. The converse is also true, where lower prices lead to an increase in aggregate demand, as well as an increase in equilibrium GDP.
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