Chapter 1 Flashcards
(19 cards)
GDP (definition)
gross domestic product is the market value of all final goods and services produced in a country in a given time period
What is excluded from GDP
Non production transactions
Examples of non production trans actions
Financial transactions:
public/private transfer payments
security transactions
Used item transactions
What does GDP focus on
Final goods and services (we don’t want to double it)
wheat is not counted as GDP as wheat is usually used in something else so they don’t want to count it twice. same with flower* car is a final product but not apart of GDP
ONLY focus on final goods and services, not intermediate
What is happening with products that GDP applies to
You are simply changing ownership, there is no created or lost value.
What type of flow does GDP have
It has a circular flow of expenditure and income
Two approaches to measure GDP
- Aggregate expenditure approach
- Income approach
Gross
The depreciation of capital (capital consumption) is not accounted for
Income approach - sources of income
• Wages, salaries, and supplementary labour income
• Corporate profits
• Interest and miscellaneous investment income
• Farmers’ income
• Income from non-farm unincorporated businesses
= Net Domestic Income (NDP) at factor cost.
• Add “net taxes” (Indirect taxes minus subsidies) and depreciation
= GDP.
How investment is financed
Investment is financed from three sources:
▪National Saving
Private saving: S
Public saving (Government budget surplus): (T– G)
▪ Borrowing from the rest of the world (M– X)
I = S + (T– G) + (M– X)
What is GDP a measure of
Production
How does GDPs value change
It changes with prices
Nominal GDP and Real GDP
Nominal - GDP at current prices
REAL - gdp at constant prices
Two methods to deal with GDP and the price level
- Constant price GDP
- Chain-weighted output index
The chain weighted output index
The chain-weighted output index method uses the
prices of two adjacent years to calculate the real GDP
growth rate.
The chain weighted output index - STEPS
Step 1: Calculate Real GDPs using last year prices.
- Calculate growth rate.
Step 2: Calculate Real GDPs using this year prices.
- Calculate growth rate.
Step 3: Calculate the average of the two growth rates.
Step 4: Repeat steps 1-3 for each pair of adjacent years to
link real GDP back to the base year’s prices.
Calculating the price level
The average level of prices is called the price level.
1. GDP deflator is an average of the prices of the goods
in GDP in the current year expressed as a percentage of
the base year prices.
2. Consumer Price Index (CPI)
A price index for only consumer goods and services.
What would happen is both production and prices rise
Nominal GDP increases
Application: economic growth
The economic growth rate is the percentage change in
the real GDP.
We measure economic growth so we can make:
▪ Economic welfare comparisons
▪ International welfare comparisons
▪ Business cycle forecasts
