GDP

Question 1

What are the 3 approaches to measuring GDP by the ABS?

Answer 1

Production approach
- sum of the value of all goods and services produced by industries in the economy in a year minus the cost of goods and services used in the production process, leaving the value added by the industries

Expenditure approach
- sum of the total expenditure on goods and services by households, investors, government and net exports
net exports = exp. on exports minus exp. on imports

Income approach
- sum of the income generated in the production of goods and services, which includes profits, wages and other employee payments, income from rent and interest earned

Question 2

GDP = Y = ?

Answer 2

C + I + G + NX

Consumption (C)
spending by households on goods and services, not including spending on new houses

Investment (I)
spending by firms on capital goods and inventories, and spending by households on new houses

Government purchases (G)
spending by federal governments on goods and services

Net exports (NX)
net purchases of Australian output by overseas countries
(NX = X – M)

Question 3

What are some shortcoming of GDP as a measure of wellbeing?

Answer 3

• distribution of GDP is not captured in GDP measures
• value of leisure is not included in GDP
• level, quality of, and access to health care and education is not measured in GDP
• GDP is not adjusted for pollution or other negative effects of production
• GDP is not adjusted for changes in crime and other social problems

Question 4

2 limitations of GDP is that is does not include:

Answer 4

• household protection
• G/S people produce for themselves
  e. g. home cooking, cleaning, child care, gardening, maintenance
• black/cash economy
• trading concealed from the gov to avoid taxes or regulations or because the G/S are illegal

Question 5

What are 2 other useful measures besides GDP?

Answer 5

• Net domestic product (NDP)
  calculated by measuring GDP and subtracting the value of depreciation on capital equipment
  Useful because: helps countries from having a falling GDP. Countries can be guided on how to place its capital stock lost through depreciation
• Gross National Income (GNI):
  Australia’s GDP plus income generated overseas by Australian residents and firms, minus the income generated in Australia by non-residents and foreign firms
  Useful because: GDP helps to show the strength of a country’s local income, GNI helps to show the economic strength of the citizens of a country

Question 6

What are nominal values?

Answer 6

The market value of final G/S evaluated at current year prices

Increase in GDP may be due only to price changes rather than in real quantity changes

Question 7

What is real GDP?

Answer 7

• measures volume of final goods and services, holding prices constant
• real GDP shows changes in output only
• ABS uses chain volume measures to estimate real GDP
• prices in each year are ‘chained’ to prices from the previous year to minimise the distortion from changes in relative prices

Question 8

How do you calculate real GDP?

Answer 8

1. Identify base year

2. Calculate real GDP using base year prices (quantity x base year unit price)

Question 9

What is the GDP deflator equation?

Answer 9

Nominal GDP / Real GDP x 100

e.g. 2015 (base year) = 25,000
25,000/25,000 x 100 = 100

2016 nominal = 30,000
2016 real = 26,700

30,000/26,700 x 100 = 112.35

Price level increased by (112.35 - 100 / 100) x 100 = 12.35%

Question 10

What is the economic growth rate?

Answer 10

The rate of change of real GDP from one year to the next.

e.g. 2015 base year = 25,000
2016 real = 26,700

26,700 - 25,000 / 25,000 x 100 = 6.8%

Question 11

How do you calculate long-run economic growth? (how to determine the years it’ll take to double economic growth)

Answer 11

70 / growth rate = no. years

e.g. 70 / 0.03 (3%) = 23.3 years

Question 12

Increases in real GDP per capita depends on increases in what?

Answer 12

Labour productivity - the quantity of G/S that can be produced by one worker or by one hour of work

Question 13

What are the 2 factors determining labour productivity?

Answer 13

Increases in capital per hour worked

• capital - manufactured goods that are used to produce other goods and services; examples include computers, office buildings and machines
• human capital - accumulated knowledge and skills that workers acquire from education and training or from their life experiences.

Technological Improvement

• change in the ability of a firm to produce output with a given quantity of inputs
• accumulating more inputs such as labour, capital, and raw materials will not ensure that an economy experiences economic growth unless technological change also occurs

Question 14

What are the two sides of the per-worker production function?

Answer 14

Real GDP per hour worked

Capital per hour worked

Technological change shifts up the production function and allows more output per hour worked.

Question 15

What are the pros (1) and cons (3) of economic growth?

Answer 15

Pro - reduced poverty and increased health, education and many other measures of welfare

Cons

• globalisation undermines distinctive cultures
• multi-national firms exploit low wages and poor health, safety and environmental regulations in the developing world
• economic growth contributes to global warming, deforestation and other environmental problems