Ch. 18: GDP Flashcards
REAL GDP!
2%
Gross Domestic Product (GDP)
the market value of all final goods & services produced in the country during a given period of time
market value
price dependent on market OR gov’t; measured in $, not quantity
Final Goods
good sold to its FINAL user; NOT intermediate goods to avoid double counting
Example of Final vs. Intermediate Good
GM car vs. Michelin tires
Current Production
reselling doesn’t count
What do households contribute to the circular flow of GDP?
Taxes, Expenditures on Imports, Expenditures on Goods & Services, Savings
In a country
GM Silverado assembled in Texas vs. GM Cadillac assembled in GM’s plant in China
What do financial systems contribute to the circular flow of GDP?
Borrowing (gov’t AND firms)
What does the gov’t contribute to the circular flow of GDP?
Wages, interest, & transfer payments; Expenditures on G&S;
What do firms contribute to the circular flow of GDP?
Taxes; Wages, Interest, Rent, & Profit
What does the rest of the world contribute to the circular flow of GDP?
Expenditures on Exports
Components of GDP (formula)
Y = C + I + G + (X - I)
Pie Chart of GDP Components
C = 69%
I = 18%
G = 18%
NX= -4%
Examples of Consumption
Durable Goods
Non-Durable Goods
Services
Examples of Inventory
Firm Investment - factories, machinery, etc.
Household Investment - NEW homes
Firm Inventories - stocks of goods that have been produced but NOT sold
Describe firm investment.
firms spending on factories/machinery used to produce other goods
Example for firm inventories.
GM (Jan 2020) = $200 mil of UNSOLD cars
GM (Dec 2020) = $350 mil of unsold cars
I inventory = $350 - $200 = $150 mil
KEY TAKEAWAYS from Circular Flow Diagram
can measure GDP by EITHER:
1. calculating total value of expenditures on final goods
2. calculating the value of total income
Value-Added Method for Measuring GDP
Selling Price of Product - Price of Intermediate Good
Calculating Value Added:
Textile Mill - Cotton Fabric = $3
Shirt Company - Shirt = $15 - Value Added = ?
$15 - $3 = $12
Failures of GDP as a Measure of Total Product
(1) not including household production
(2) black market - isn’t taxed or regulated, activity not reported
Components of Household Income
(1) Compensation - 68%
(2) Sole Proprietorship - 10%
(3) Rental - 4%
(4) Corporate Profit - 15%
(5) Interest - 4%
Failures of GDP as a Measure of Well-Being
(1) doesn’t consider value of leisure = retirement worth more than job income, even though income added to GDP
(2) not adjusted for negative effects of production = should compensation for cost of pollution be in GDP?
(3) increase for goods AND bads = increase in crime may increase GDP
