2 Measuring the Macroeconomy Flashcards
Define GDP
Gross domestic product is the market value of the final goods and services produced in an economy over a certain period.
What are the different approaches of measuring GDP?
Production - the value of all the output produced
Expenditure - the value of all the output consumed
Income - the value of all the income earned
Production = expenditure = income
Equation for GDP.
What approach does it use?
Where, Y = GDP (in dollars), C = consumption, I = investment, G = government purchases and NX = net exports (exports - imports)
It uses the expenditure approach

Define capital
The inputs into production other than labour that are not completely used up in the production process.
What is common observation in economies over the last 70 years (capital and labour)?
Economies becoming more capital-intensive. Labour’s share of GDP gradually declining to about two thirds of GDP.
Why, when using a production approach to GDP, do we not double count?
Only the final sale of goods and services counts to GDP.
Each producer creates an amount of GDP equal to the amount of value that is added during production - this is called value added.
What equation relates nominal and real GDP?
Nominal GDP = Price Level × real GDP
Define Laspeyres index
Method of computing the change in real GDP using the initial prices.
Define Paasche index
Method of computing the change in real GDP using final prices.
Define Fisher index
Also called chain weighting
Method of computing the change in real GDP by taking averages of the Laspeyres and Paasche indices.
What is the GDP deflator?
The price level that satisfies the equation:
Nominal GDP = Price Level × real GDP
How can we calculate the percentage change in nominal GDP using percentage changes in price level and GDP?
Percentage change in nominal GDP ≈ percentage change in price level + percentage change in real GDP
Define exchange rate
The price at which one currency can be traded (exchanged) for another.
How can you calculate another country’s GDP in the domestic currency?

Equation for another country’s real GDP in terms price levels and nominal GDP

What is the equation for economic profit?

What is the equation for accounting profit?

Calculate GDP using the output approach

Output method: 10*(400-200)+10*(200-1000)+1000 = 4000
Calculate GDP using the expenditure approach

Expenditure method: 10*400 = 4000
Calculate GDP using the income approach

Income method: 2800 + 1200 = 4000
Calculate US GDP using the output approach

Output method: 10*(400-200) = 2000
Calculate US GDP using the expenditure approach

Expenditure method: 10*400 - 10*200 = 2000
Calculate US GDP using the income approach

Income method: 1200 + 800 = 2000
Issues with GDP
- Not all market activity is recorded in official statistics
- Market prices may not reflect social values so may not be a measure of welfare
- GDP is gross - no allowance for depreciation, nor sustainability
- GDP may not relate to consumption - which is closer to measuring welfare
- No allowance for inequality
- Second hand goods are not included - change of ownership but not production
- Capital gains on houses not included
- Inventories count as a firm buying its own production
- Despite most govt. services are not sold, they are included using price measures by cost (e.g. public education = sum of teacher salaries, operating expenses and equipment).
GDP vs GNI
[definitions]
GDP: denotes value of output of goods and services produced within a country (including nationals and resident foreigners). Measures value added in the country.
GNI: denotes value of output of goods and services produced by the nationals of a country (excl. foreign residents remittances, but incl. remittances from nationals abroad). Measures income of country’s citizens.
How to get from UK GDP to UK GNI
Add:
- remitted profits from UK firms operating abroad
- interest payments and dividends received from overseas investments
- remittances from UK residents based overseas
- grants received from foreign governments
Deduct:
- remitted profits from foreign firms operating in the UK
- interest payments and dividends received from foreign investments in the UK
- remittances from overseas residents based in the UK
- grants paid by UK government
What is the Easterlin Paradox?
As GDP per capita goes up, % those that say they are very happy stagnates or even declines.