Ch 17 Flashcards
(33 cards)
Gross Domestic Product
The value of the final goods and services produced in a country during a given period
Market value
Add up the market values of the different goods and services into a single number
Final goods and services
Both intermediate and final goods
Produced in a country during a given period
Output produced in a nation -GDP
Output produced by a nations citizens- GNP
Three ways to measure GDP
- value added method
- expenditure method
- income method
expenditure method
- Views GDP as total output (Y) purchased by:
- Households consume (C)
- Firms invest (I)
- Gov’t purchases (G)
- Foreign sector buys exports:
net exports (NX)=exports – imports
Y=C+I+G+NX
Consumer durables:
long lived consumer goods such as cars, furniture
Consumer non-durables:
short lived goods such as food and clothing
Business fixed investment:
new capital goods such as machinery, factories. Firms buy capital goods to increase their capacity to produce.
Residential investment
new homes and apartment buildings
Inventory investment:
additions of stocks of unsold goods at firms/retailers. E.g. a firm has $1000 worth of flour in the beginning of 2000, and $1500 in the end of 2000.
Distinction: financial vs. real investment:
Savers make financial investment (allocate savings into e.g. stocks, bonds)
Firms make “real” investment (buy e.g. tractor)
Government spending
Purchases by Gov’t on final goods and services. E.g. fighter planes, teaching in public schools
Does not include transfer payments such as pensions, unemployment benefits, social security benefits.
Interest paid on the government debt is also excluded
Net Exports
domestically produced final goods and services that are sold abroad
Net Imports
purchases by domestic buyers of goods and services that were produced abroad. Since imports do not represent spending on domestic production they must be subtracted
NX= exports - imports
The income method
GDP equals labor income + capital income
Labor income: wages, salaries and the incomes of the self employed
Capital income
payments to owners of physical capital (such as factories and machines) and intangible capital (such as copyrights and patents)
After-tax profits earned by business owners, the rents paid to owners of land or buildings, interest received by bond holders
Calculating the price level
GDP deflator= Nominal GDP / Real GDP *100
Real GDP = Nominal GDP / Real GDP Deflator
Real GDP is not the same as economic well-being
GDP captures only goods and services that are priced in markets
Leisure is a non market good.
Wealthy societies nowadays enjoy more leisure than in the past. Extra hours of leisure are not included in GDP
Nonmarket economic activities
housekeeping, volunteer services
Real GDP is not the same as economic well-being
GDP does not reflect pollution and resource depletion
China tremendous growth in real GDP but air and water pollution
The exploitation of finite resources (e.g. oil) is overlooked by GDP
GDP is related to economic well-being
Real GDP per person is positively associated with many things people value (e.g. high material standard of living, better health and life expectancies, better education)
Why do fewer children complete high school in poor countries than in rich countries?
- Poor societies are heavily agricultural
- Child labor
- Sending children to school imposes a high opportunity cost to the family
- Schooling is costly in poor societies
- In rich societies children have few work opportunities; low opportunity cost of sending children to school
