Measuring economic activity Flashcards
Lecture 3
In which direction do the G&S move
in the opposite direction of money
GDP
Market value of all final goods and services produced within a country in a year.
3 ways to measure production
spending, output and input
spending (4 components and descriptions)
- consumption
- investment: business assets, inventory, residential construction
- government purchases: not transfers - the government gives money, doesn’t get anything in return
- net exports (exports – imports)
output
- final goods and services (ignore intermediate prod’n)
value added (revenue - cost of direct inputs) – not including labor
income
- add up all sources of income (wages + profit)
- does not include capital gains (that isn’t income from production)
gross investment
= net investment + depreciation
is this an investment: replacement of a broken vehicle
yes
are these investments: a purchase of corporate stock, a rise in value of a stock, less inventory, used truck
no
is this an investment: If you sell your used car to a dealership for $2,000, and they resell it for $8,000, that is income of $6000
yes
Is GDP a Useful Measure?
- strong correlation between income per capita and other positive measures
- life satisfaction, education, infant mortality, life expectancy
- a good indicator, not a good targe
Limitations of GDP (6)
- market value (not use value) of purchased goods
- non-market activities – home production
- shadow economy – illegal and unreported economy
- environmental degradation – are all actions good?
- leisure – is more work always good?
- distribution of incomes or spending
nominal GDP
= total production measured at current market prices
P x Q
chain-weighting
= use average prices over two years to calculate real GDP
base year pricing
= decide the base year compare everything back to it
