Chapter 6 Flashcards
nominal GDP
- money value at CURRENT PRICES of all final products and services produced annually in a country (aggregate output)
- HOW TO CALCULATE: current year quantity of output multiplied by the current market price
- is measured as a FLOW: an amount per unit of time
- differences in nominal GDP between years are due to either price or quantity changes
real GDP
- money value at CONSTANT PRICES of all final products and services produced annually in a country (aggregate output)
- HOW TO CALCULATE: constant price of previous year multiplied by quantity output of current year
- is measured as a STOCK: an amount at a moment of time
- differences in real GDP between years show only changes in quantities
REAL GDP per person
- the best measure of material standard of living
- formula: real GDP/ Population
Value Added
- value of output MINUS value of intermediate products and services bought form other businesses
- also means the value of outputs MINUS the value of inputs
- it solves the problem of double counting and of distinguishing between final and intermediate products and services
- value added = aggregate income (or inputs income)
- value added = aggregate spending (or value of final products and services)
enlarged circular glow spending formula
C+I+G+X-IM= Y
-C: consumer consumption
- I: investments for businesses
- G: government spending
- X: exports
- IM: imports
Y: income
potential GDP
- real GDP when all inputs (labour, capital, land/ resources, and entrepreneurship) are FULLY EMPLOYED.
potential GDP per person
formula: potential GDP/ population
economic growth
- expansion of economy’s capacity to produce products and services, increase in potential GDP (per person), caused by increases in quantity or quality of a country’s inputs
Points inside the PPF show
unemployed inputs
points on the PPF show
fully employed inputs
economic growth rate
annual % change in real GDP per person
formula: real GDP per person this year - real GDP per person last year / real GDP per person last year x100
rule of 70
number of years it takes for initial amount to double is around 70 years divided by the annual % growth rate
business cycles
up and down fluctuations of real and potential GDP
expansion
where real GDP increases (BOOM)
peak
highest point of an expansion… the turning point and beginning of contraction
contraction
period during which real GDP decreases (BUST)
trough
lowest point of a contraction; the turning point beginning an expansion
recession
two or more successive quarters of contraction of real GDP
output gap
real GDP- potential GDP
recessionary gap
real GDP below potential GDP
- gap is a negative number
inflationary gap
real GDP above potential GDP
- gap is a positive number
real GDP per person is a limited measure of well being and DOES NOT INCLUDE…
- non market production
- underground economy
- environmental damage
- leisure
- policial freedoms and social justice
UN human development index (HDI)
measures the quality of life by combining life expectancy, educational achievement and income
Final product or service
consumed directly by consumers
