Gross Domestic Product(GDP)

Gross domestic product (GDP) measures total output in the domestic economy. Nominal GDP, real GDP and potential GDP are three different measures of aggregate output. Nominal GDP is the market value all final good and services produced in the domestic economy in a ONE YEAR period at current prices. By this definition,

(1)only output exchanged in a market is included (do-it - yourself services such as cleaning your own house are not included)
(2) output is valued in this final form (output is in it final form when no further alteration is made to the good which would change its market value.
(3) output is measured using current year prices.

Because nominal GDP values are inflated by prices that increase over time, aggregate output is also measured holding the prices of all goods and services constant over time. This valuation of GDP at constant prices is called REAL GDP.

the third measure of aggregate output is potential GDP, the maximum production that can take place in the domestic economy without creating upward pressure on the general level of prices. Conceptually,potential GDP represents a point on a given production possibility frontier.

The US economy's potential output increases at a fairly steady rate each year while actual real GDP fluctuates around potential GDP. The fluctuation of the real GDP are identified as business cycles. The GDP gap is the difference between the potential GDP and real GDP; it is positive when potential GDP exceeds real GDP and negative when real GDP exceeds potential GDP. A positive gap indicates that there are unemployed resources and the economy is operating inefficiently within its production possibility frontier. It therefore follows that an economy's rate of unemployment rises as its GDP gap increases and falls when the gap declines.An economy is operating above its normal productive capacity when there is a negative gap.