Measuring economic activity Flashcards
(28 cards)
What does GDP do
- measures the total income of everyone in the economy
- or equivalently the total expenditure (output of goods and services)
- income must equal expenditure
What do market prices represent
- the value of goods
- if one good costs twice as much as another, it contributes twice as much
- this definition does not include things sold illegally or produce and consumed at home
What does the word ‘final’ mean in ‘final goods’
The value of any intermediate goods is included in the price of the final good
What is the total income identity
Y = C + I + G + NX
Define the expenditures that make up the right hand side of the income identity
(C + I + G + NX)
C = consumption
I = investment
G = government purchases
NX = net exports
What is consumption (C)
- spending by households on goods and services
What is investment (I)
- spending on capital equipment and structures (not stocks or bonds)
- households spending on housing
- inventory accumulation
What are government purchases (G)
- spending on goods and services by local and national governments
- gross investments
What are net exports (NX)
- Exports minus imports
What were the 2019 components of UK GDP
- consumption about 66% (typical of wealthy economies)
- investment swings substantially over the business cycle but averages 10-15%
- government purchases around 20%
- net exports are quite volatile
What is gross national product (GNP)
Total income earned by UK nationals.
This includes any income earned by Brits abroad but excludes foreigners in the UK.
What does total spending rising from one year to the next mean
- the economy could be producing a larger output of goods and services
- goods and services being sold at higher prices
Define nominal GDP
Production of goods and services valued at current prices
Does an increase in GDP mean an increase in production?
No, so to counteract we use real GDP
What is real GDP
- production of goods and services valued at constant prices given a base year
- quantities change but prices are fixed
- attempts to adjust for inflation
What is the GDP deflator
Nominal GDP
________________ x 100
Real GDP
What does the GDP deflator do
Measures the current level of prices relative to the base year
How do you calculate inflation rate
(GDP deflator1 - GDP deflator2)
___________________ x100
GDP deflator 1
Name issues with real GDP per capita
- misses the value of anything outside of markets
- nothing about income distribution
How to represent middle class?
Use the median income
What is the consumer price index (CPI)
Measures the overall level of prices and goods bought by computing the cost of a fixed basket of goods in different years
How to calculate inflation rate in year 2 (using CPI)
(CPI2 - CPI1)
_____________ x 100
CPI1
What does a fixed basket mean
A set group of products commonly bought by consumers
What is the producer price index (PPI)
- measure in the cost of a basket bought by firms
- changes in PPI are useful to predict changes in CPI (firms pass on costs to customers)
