Measuring GDP Flashcards
GDP definition
The value of goods and services in an economy
What are the three ways GDP can be measured
Production, Expenditure, Income
How does the Production approach calculate GDP
Sums up firms value added, which is the firms sales revenue minus the firms purchase of intermediate products from other firms.
How does the Expenditure approach calculate GDP
Sums up purchase of goods and services by different groups or categories.
Y = C+I+G+(X-M)
How does the Income approach measure GDP
Sums up income received by labour and the owners of physical capital (e.g. house, land) or financial capital (stocks and bonds)
What are two problems with GDP
Does not count negative externalities such as pollution, noise and crime
GDP doesn’t capture transactions conducted in underground/informal economy
What two important things does GDP exclude
Home production of cleaning, cooking and child care done in the household
Does not record leisure, which contributes to well being
Nominal GDP
Total value of production using market prices to determine the value of each unit that is produced
Real GDP
Total value of production using market prices from a specific base year to determine the value of each unit produced
Consumer Price Index
Price level of a particular basket of consumer goods and services
CPI equation
100 x Cost of consumer basket in current year / Cost of Consumer basket in base year
What does GNP record
Gross National Product records production of domestically owned labour and capital in the country and abroad
What percentage of GDP does the underground economy make up in developed countries and developing countries
10% - developed
70% - undeveloped
