In the study of Macro-economics we are no longer interested in individual markets - the market for shoes, cars, vegetables and so on. One would think of the market as one aggregate market (though one should realise that there are some serious flaws or pitfalls in thinking of markets in such a way). In any event, it has its uses to add up all separate goods and services into one measure of aggregate product or output. The issue now is to decide on a measure to determine the value of all the goods and services. The most useful measure that has arisen from the improvements in National Accounting has been the concept that we now know as the GDP (Gross Domestic Product) - measured on the horisontal axis of the graph. Since we cannot talk about the price of an individual homogenous product any longer, the vertical axis is represented by general price level (or inflation).
It (GDP) can be defined as "The market value of all final goods and services which are produced within the borders of a particular geographical area during a certain period (usually one year)."
A useful resource to use is the WIKIPEDIA article on GDP:
http://en.wikipedia.org/wiki/Gross_domestic_product
There are at least three methods of calculating GDP. These three are a) the value of the final product b) value of added by each transaction level and c) income approach
A few comments are appropriate here - final goods and services are different from intermediate goods on the grounds that they are purchased by buyers for final use and not for use in a subsequent production process). The use of only the final product eliminates the possibility of double counting in the determination of GDP. This approach is called the expenditure approach since it measures the expenditure by consumers on the final product. The two other approaches are the value added or production approach and the income approach (or factor income approach) since it measures the amout paid towards the remuneration of the production factors involved in the production of goods and services. This amount is exactly equivalent to the other two because of the way it is constructed - profit is used as an balancing figure in the equation.
C.M. Heydenrych
2013