Chapter 5 - The Measurement of National Income Flashcards
What is value added?
The value of a firm’s output minus the value of intermediate goods used in production. Prevents double counting in GDP.
How is GDP measured?
Two main approaches:
Expenditure Approach: C + I + G + (X - IM)
Income Approach: Wages + Rent + Interest + Profits + (Indirect Taxes - Subsidies) + Depreciation
What is the formula for GDP (expenditure side)?
GDP = C + I + G + (X - IM)
C: Consumption
I: Investment (includes inventory, capital goods, housing)
G: Government purchases
X: Exports
IM: Imports
What are the components of income in GDP?
Wages and salaries
Interest
Business profits
Rents
Indirect taxes (net of subsidies)
Depreciation
What is nominal GDP?
The value of all final goods and services produced in a year, measured using current prices.
What is real GDP?
The value of all final goods and services produced in a year, measured using base-year prices (adjusted for inflation).
What is the GDP deflator?
GDP Deflator = (Nominal GDP / Real GDP) × 100
Measures the average price level of all goods and services produced domestically.
What are some omissions from GDP?
Illegal activities
Underground economy
Non-market transactions (e.g., housework)
Leisure time
Environmental degradation
Why does GDP not perfectly reflect living standards?
Because it omits factors like leisure, income distribution, environmental quality, and unpaid work.
What is real GDP per capita?
Real GDP divided by population. Used as a rough measure of average material living standards.
What is the difference between real and nominal GDP?
Real GDP: adjusted for inflation; reflects actual production.
Nominal GDP: unadjusted; reflects changes in price and quantity.
What is the difference between nominal and real interest rates?
Nominal Interest Rate: The stated rate.
Real Interest Rate = Nominal Rate - Inflation Rate
What is chain weighting?
A method that averages GDP calculations across multiple base years to reduce distortion caused by changing relative prices.
What is the purpose of the Human Development Index (HDI)?
To measure well-being beyond GDP, using life expectancy, education, and real income (adjusted for inequality)
GDP Deflator vs. CPI - What’s the difference?
GDP Deflator: Includes prices of all domestically produced goods/services.
CPI: Includes prices of consumer goods only (including imports).
Why is statistical discrepancy included in national income accounting?
To reconcile small differences between the expenditure and income approaches to GDP caused by measurement errors.
