Chapter 6: GDP Flashcards
What are the goals of macroeconomic policy? (3)
- Economic Growth
- Low Unemployment
- Low Inflation
How do economists typically measure the size of a nation’s overall economy?
GDP / Gross Domestic Product
GDP \ Gross Domestic Product
Value of all final goods and services produced in a country in a given year
What type of goods and services are excluded from GDP?
- Intermediate
- Illegal
- Used
- Income transfer payments (like Social Security, unemployment)
What country has the largest GDP in the world? What was its 2016 GDP?
United states
$18.6 trillion
Who measures GDP?
Government economists at the Bureau of Economic Analysis, within the US Department of Commerce
How often is a business census conducted in the US?
Once every five years
In the 2nd and 7th year of each decade
Trade Balance
Gap between imports and exports
Trade Surplus
Nation’s exports are greater than its imports
Trade Deficit
Nation’s imports are greater than its exports
Physical Components of GDP (5)
- Durable goods
- Nondurable goods
- Services (largest category)
- Structures
- Inventories (change in)
5 Components of GDP
- Consumption (consumer spending)
- Investment (business spending)
- Government spending
- Imports
- Exports
Demand Components of GDP (5)
- Consumption (consumer spending)
- Investment (business spending)
- Government spending
- Imports
- Exports
Investment
GDP definition
Business spending. Purchase of new capital goods and equipment, real estate, and inventories
Investment Expenditure
Purchases of physical plant and equipment by businesses
How much of the GDP does investment typically make up?
Why is it important
15-18%
This is typically where jobs are created
How much of the GDP does government spending typically make up?
20%
Are government transfer payments, such as unemployment benefits and SS payments to seniors, included in GDP?
No. The government does not receive a good or services in exchange. These are income transfers.
GDP equation
GDP = Consumption + Investment + Government + (Exports - Imports)
Consumption
Consumer spending
Double-Counting
Counting output more than once as it travels through production stages
Intermediate Goods
Goods that go into the production of other goods
excluded from GDP calculations
Depreciation
Capital ages and loses its value
GNP / Gross National Product
GDP + production by domestic businesses abroad - production by foreign businesses within nation’s borders
Difference between GDP and GNP
GDP: Production within a nation’s borders
GNP: Production by a nation’s citizens and firms, regardless of borders
NNP / Net National Product
GNP - Depreciation
Net Operating Surplus
Interest, rent, and profit income
Interest
(income on loans) - (interest paid on borrowing)
Two Categories of Household Income
- Wage income
2. Interest, rent, and profit income
Nominal GDP
GDP expressed in prices of that same year
not adjusted for inflation
Real GDP
GDP expressed in prices of the base year
adjusted for inflation
What is the goal of calculating Real GDP?
Measuring the extent of production increase, by removing the influence of price changes between years
In the “base year” for calculation purposes, what is the relationship between Nominal GDP and Real GDP?
Nominal GDP = Real GDP
Real GDP Growth Rate% Equation
[(real GDP in Y1 - real GDP in Y0) x 100] / Y0 real GDP = % Change
Factor Cost
Market price + Gov’t Subsidies - indirect taxes (i.e. sales)
Calculation of a country’s total production that is ultimately sold in others countries
Exports divided by GDP
Recession
Significant decline in real GDP
Depression
Lengthy and deep recession
Peak
Highest point of the economy, before the recession begins
Trough
Lowest point of a recession, before recovery begins
Graph of economy: Peak to Trough
Recession / downturn
Graph of economy: Trough to Peak
Economic upswing
PPP / Purchasing Power Parity
Exchange rate that provides a longer-run measure than day-to-day. Used for cross country comparisons of GDP
Market Exchange Rate
Exchange rate that varies on a day-to-day basis
What type of exchange rate is typically used to compare GDP between countries?
PPP / Purchasing Power Parity exchange rate
GDP Per Capita
GPD / Population
* check that units are the same (million, trillion, etc)
Does GDP per capita tell us about income inequality in society?
No, because it is only an average.
What does GDP not tell us about a society?
- Income inequality
- Variety of choice
- Availability of technology
- Leisure time
- Environmental quality
- Health and education
What is a better measure of a nation’s wealth - GDP or GDP per capita?
GDP per capita
Takes population size into account
