Chapter 5.3 Flashcards
What is the difference between nominal and real GDP?
Nominal GDP is the total market value of all goods and services produced in a country in a given year, valued at current year prices. Real GDP is the value of all goods and services produced, adjusted for price changes or inflation, and valued at constant base-year prices.
Example: Nominal GDP for the US in 2020 was $21.43 trillion, while real GDP for the same year was $18.57 trillion.
How do nominal and real GDP relate to living standards?
Nominal GDP measures economic output using current prices, which can be affected by inflation, while real GDP provides a more accurate measure of economic growth by accounting for price changes, reflecting true increases in production and, potentially, living standards.
Example: Real GDP growth of 3% indicates an actual increase in the production of goods and services, contributing to potential improvements in living standards.
What is the GDP deflator?
The GDP deflator is a price index that measures the change in prices of all new, domestically produced, final goods and services in an economy. It is calculated as the ratio of nominal GDP to real GDP times 100, indicating how much a change in the base year’s GDP can be attributed to changes in the price level.
Example: If the GDP deflator is 110 for a given year, it means prices have increased by 10% since the base year.
How do changes in the GDP deflator reflect economic conditions?
If the GDP deflator rises, it suggests that prices have increased over the base year, indicating inflation. Conversely, a fall in the deflator suggests deflation. Changes in the deflator help distinguish between real and nominal changes in GDP.
Example: A decrease in the GDP deflator could indicate a period of economic recession with falling prices.
What are some major omissions from GDP?
GDP does not account for non-market transactions, illegal activities, the underground economy, home production, and economic “bads” such as environmental damage. These omissions can lead to an underestimation or overestimation of true economic activity and well-being.
Example: The exclusion of home production undervalues the economic contributions of individuals who provide services within the household.
How does the legalization of marijuana in Canada affect GDP measurements?
The legalization of marijuana in Canada means that its production and consumption are now recorded in official GDP statistics, potentially increasing the measured GDP. Previously, these economic activities were part of the underground economy.
Example: After legalization, marijuana sales contributed $2 billion to Canada’s GDP in the first year.
What is the underground economy, and how does it affect GDP?
The underground economy includes legal activities not reported for tax purposes. Transactions in this sector are omitted from GDP calculations, such as cash jobs that are not declared as income, leading to potential underestimations of GDP.
Example: The underground economy in some countries can account for a significant portion of economic activity, impacting GDP accuracy.
How do non-market activities like home production and volunteering affect GDP?
Activities like home production and volunteering contribute to economic well-being but are not included in GDP because they do not involve market transactions. This exclusion can lead to an undervaluation of the actual economic activity and well-being.
Example: Volunteer work contributes to social welfare but is not monetarily valued in GDP calculations.
Why might GDP not fully capture changes in living standards?
While GDP measures economic activity, it does not account for factors like income distribution, environmental quality, leisure, or the intangible benefits of education and health, which are essential to living standards.
Example: A country with high GDP per capita may still have low living standards due to income inequality and poor environmental conditions.
What are some alternative measures to GDP for assessing living standards?
Alternatives like the Human Development Index (HDI) consider broader aspects of human development, including life expectancy, education, and income equality, providing a more comprehensive assessment of living standards beyond economic output alone.
Example: The HDI ranks countries based on health, education, and income, offering a more holistic view of well-being than GDP.
What is the relationship between GDP growth and productivity?
GDP growth driven by increased productivity typically results in higher real incomes and improved living standards, as it reflects more efficient use of labor and capital in the economy.
Example: A sustained increase in productivity can lead to long-term economic growth and higher living standards for a nation.
How do economic “bads” influence GDP calculations?
Economic “bads” such as pollution and social costs of digital platform use are not deducted from GDP, potentially overstating economic well-being when these negatives accompany economic growth.
Example: The GDP of a country may increase due to increased industrial production, but the environmental costs of pollution are not subtracted from the GDP figure.
