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Flashcards in Lecutre Three Assessable Notes Deck (27):

Define GDP

Market value of all the final goods and services produced within a country in a given time period.


What are the four parts of gdp

value produced
What produced
Where produced
When produced


Explain value produced

Essentially market value. The value of the product is the price it sells I. The market. If it had not market price there is no value from a GDP perspective. Example: Jane hired a butler to cook and clean for $20 for 5 hours so the GDP is $100 ($20 X 5) but if she married the butler then he continues all the same work but for $0 thus no GDP value or market value.


explain what produced

A final good or service is something that is produced for its final user.


Explain where produced

To be part of Australia's GDP it must be produced within Australia's borders.


Explain when produced

We must set a time period eg 1st jan to 31st Dec. Australia's GDP annually is calculated from the 1st July to 30th June. Thus the financial year.


Alternative GDP definition

The total money value of the goods and services produced by the residents of a country during a specified period. Note: the production must be new. Selling a second hand car first sold in 2005 was already added to 2005 GDP when it was first sold. Adding it to 2015 GDP is wrong as nothing new has been produced.


Who are the four groups buying the goods and services that make up GDP ?

Also known as expenditure

Consumption expenditure
Government expenditure
Net exports of G & S


Explain consumption expenditure

Expenditure by households in consumption goods and services. It includes expenditures on no durable goods eg everyday goods such as oj or pizza, durable goods such as television d and services such as concerts or haircuts. Also includes house and apartment rentals, including the rental value of owner occupied housing. Purchase of new houses is not included as this goes under investment expenditure.


Explain investment expenditure

Purchase of new capital (K) goods eg machinery. And additions to inventory eg adding to stock. Capital goods are durable goods produced by one firm and bought by another. An example is Qantas buying planes from Boeing. Investment included purchase of new houses. Investment doesn't include the purchase of company shares and bonds.

Additions to inventory: unsold products are bought by the firm and kept as inventory or stock. When they get sold next year they are now in accounting terms second hand goods and aren't counted in next years GDP but in the original years GDP.


explain government expenditure

Expenditure by all levels of government including local, state and federal/commonwealth on G&S. For example; the Australia airforce buys jet fuel from BP, the department of foreign affairs buys airline tickets and the parliament buys internet services


Explain net exports of G&S (NX)

NX of goods and services is the value of exports (x) of goods and services minus the value of imports (M) of goods and services thus NX = X-M. Exports of goods and services are items that firms in Australia produce and sell to the rest of the world. Imports of goods and services are items that households, firms and governments in Australia but from the rest of the world. Imports are produced in other countries, so expenditure on imports is not included in expenditure on Australian produced goods and services. If exports exceed imports, net exports are positive an expenditure on Australian produced goods and services increases. If imports exceed exports net exports are negative and expenditure on Australian produced goods and services decreases.


What is the formula for total expenditure

TE = C + I + G + NX or TE= C + I + G + (X-M)


Explain all expenditure as income

If you buy milk for $1 (your expenditure) that money will go as income to the person selling it. Thus there are no leakages eg expenditure/spending will always equal income. If we can calculate GDP using total expenditure it must the follow that we can calculate GDP using income (Y).


Explaining income in sections

Who gets what income?

Labour (L) earns a wage: so with the wage you can buy G&S. If you use $10 of your wage to buy a $10 magazine then from the TE approach (C) rises by $10 and by the income approach income rise by 10 and GDP rises by 10 regardless of approach used

Capital earns interest - you lend money to a businesswoman to produce cars; she pays you interest for the loan.

Land earns rent - you lease a plot of land to plant wheat. You pay the landowner a rent - or maybe say a building. The businesswoman who produced cars needs a factory to get the production going. So she rents a factory and the factory gets rent.

Entrepreneurs earn a profit: there are the people who set up the business. The lady who decided to produce cars is an entrepreneur. She has costs, pays L a wage, interest to the capital owner and rent. But her sales are her revenue, as long as her revenue exceeds costs she makes a profits


What is the income formula

Same as total expenditure but Y = C + I + G + NX


What is the GDP formula

GDP = TE = Y = C + I + G + NX


What is the most common forms of expenditure

Consumption expenditure (C) is the largest contributor to GDP in Australia and indeed pretty much every developed country.

Investment (I) is 23.9% in Aus. It is important because it increases our productive capacity eg shifts out PPF outwards. The more I we have the more likely we are to produce more G&S in the future and hence increase c in the future. Is highly volatile and largest contributor to sharp changes in GDP.

G is not small either. Governments engage in many economic activities from running hospitals etc that add expenditure

NX can be positive (X > M) or negative (X


What are the three main income categories for income approach

Wage income
Company profits and imputed rent
Mixed income


What is statistical discrepancy ?

Statistical discrepancy occurs when TE and Y approached produce different results. If it is a small difference we just say close enough and explain it as a statistical discrepancy.


What is real and nominal GDP?

Nominal GDP is the calculation of the value of what we produce ie P*Q of every product in a given year. Calculating is simply price X quantity. Add up total price of all quantity to create total GDP. As quantity and price changes so does nominal GDP. Changes in price can mislead if economy actually got bigger so real GDP is introduced.

Real GDP: fix price at a base year and let output or quantity vary between years. So using 2010 prices for example on 2011 quantity produced a new total numbers than nominal GDP because nominal GDP looks at 2011 prices instead of fixed 2010 prices.



Explain how real GDP can be used to compare the standard of living over time?

Comparing standard of living over time: assume the higher the GDP per capital eg per person the better off society is. Comparing real GDP in two different years helps us see standard f living.

The growth of potential GDP per person: potential GDP is the level of real GDP when all the economy's factors of production are fully utilised. Eg on production efficient on the PPF. The greater the growth of potential GDP per person, the faster economic growth will be.

Fluctuations of real GDP per person around potential GDP. In this situation, it doesn't matter if potential GDP per person is very high if real GDP is less than potential GDP. Thus in the inside of the PPF instead of on the line. The further way real GDP is from potential GDP the slower the economic growth for its full potential.


Other uses of real GDP

Can be used to track the course of the business cycle (BC). Changes in real GDP tell us how the economy is doing right now. If real GDP falls then we know that the economy is not doing well (also unemployment would likely increase). We call the fluctuations in the pace of economic activity the business cycle. A business cycle us a periodic but irregular up and down movement of total production and other measures of economic activity such as employment and income. The business cycle isn't a regular, predictable and repeating cycle like the phases of the moon. The timing and the intensity of the business cycle vary a lot but every cycle has two phases eg an expansion and a recession and with two turning points known as a peak and a trough


Expain expansion

An expansion is a period during which real GDP increases. In the early stages of an expansion, real GDP remains below potential GDP and as expansion progresses, real GDP remains below potential GDP and as the expansion progresses, real GDP eventually exceeds potential GDP.


Explain recession

A recession is a period where real GDP decreases for at least two successive quarters; or a period of significant decline in total output, income, employment, trade, usually lasting 6 months to a year, marked by contractions in many areas of the economy.


Explain peak and trough

Peak is the highest level of real GDP that has been attained up to that time. An expansion ends and a recession begins at a business cycle peak.

A trough occurs when GDP hits its lowest point. A recession ends at a trough and a new expansion begins from it.


How to compare the standard of living among countries

Using real GDP: we convert the numbers for other countries into Australian dollar ax to calculate real GDP we must also use a common set I prices called purchasing power parity prices for all countries. The international monetary funds performs these calculations. Standard of living is dived from the countries with people making more money per day.