GDP Flashcards
what is the circular flow diagram?
illustrates the interdependence of the macroeconomy
explain the circular flow of income and resources
*PICTURE
what is the difference between income, output, and spending?
they are all the same
all output that’s produced gets sold at some market price, therefore the market value of total output must be equal to total spending
every dollar that someone spends is a dollar of income for someone else, hence total spending must be equal to total income
what is GDP?
GDP is gross domestic product
the market value of all final goods and services produced within a country in a year
key measure of economic activity
describe what it means by “GDP is the market value” in the definition of GDP
the value of each item is its market price times the quantity produced
the value of everything produced is added up
what does it mean by “of all” in the GDP definition?
as a comprehensive measure, GDP includes everything produced and sold in markets
nonmarket (underground economy) goods and services are not included
what does it mean by “final goods and services” in the GDP definition?
- intermediate goods and services are not included (ex. lumber used to make a couch)
- only final goods and services are included (ex. the couch)
what does it mean by “produced” in the GDP definition?
- GDP measures production, so it does not count the resale of existing goods and services
- second hand sales change only the ownership of the product
what does it mean by “within a country” in the GDP definition?
- US GDP measures what is collectively produced domestically (within the US)
- this includes products made in the US by foreign owned businesses
- US GDP does not include products made in foreign countries by American-owned businesses
what does it mean by “in a year” in the GDP definition?
- we need a time frame for GDP
- a year is typically used, although measures are also reported quarterly
what are the three ways of measuring GDP?
since GDP is total spending, total output, and total income, we can calculate GDP by either
1) add up all spending
2) add up every dollars worth of output produced
3) add up all income
how is total output calculated?
value added = total sale - cost of intermediate inputs
what does value added mean?
the amount by which the value of an item is increased at each stage of production
how is total income measured?
total income = total wages + total profits
capital gains and losses are not counted as new income (your earnings or losses from selling an existing asset)
called gross domestic income
what is labour share?
describes the share of total income goings to workers
what is capital share?
describes the share of total income going to owners of capital
what is the trend observed with labour share?
labour’s share of GDP is declining (more money is going to the firms rather than the labourers)
how do you measure total spending?
Y = C + I + G + NX = C + I + G + (X-IM)
C = consumption = household purchases
I = investment = business purchases
G = government purchases
NX = net exports
X = exports
IM = imports
what are some of the limitations of GDP?
- prices are not values
- nonmarket activities are excluded
- the shadow economy is missing
- environmental degradation isn’t counted
- leisure doesn’t count
- GDP ignores distribution
what does it mean by prices are not values as a limitation?
GDP effectively assigns each good and service a value equal to its market price
price is not a good indicator of value when either consumer surplus or a market failure is present
what does it mean by nonmarket activities are excluded as a limitation?
GDP does not measure all productive activity
non market activities are omitted from GDP
what does it mean by the shadow economy is missing as a limitation?
the shadow economy includes economic activity purposely conducted out of view of the government
these activities are unmeasured and therefore are excluded from GDP
what does it mean by environmental degradation isn’t counted as a limitation?
GDP treats natural resources as if they have no value until they are transformed into something else
the cost of environmental degradation is ignored
what does it mean by “leisure doesn’t count” as a limitation?
GDP includes the benefit of work, which is more income
GDP does not include the cost of work, which is less leisure
what does it mean by “GDP ignores distribution” as a limitation?
the rich get richer, the poor stay the same
- Higher GDP is correlated with better life outcomes
what is nominal GDP?
GDP measured in today’s prices
measures the value of GDP right now, based on current prices
what is real GDP?
GDP measured in constant prices
excludes the effect of price changes
measures changes in the quantity of output produced
used to measure economic growth
take average of two years to calculate real GDP
what is the formula for GDP deflator?
GDP deflator = nominal GDP / real GDP x 100
OR
GDP deflator = (ptqt)/ (p0qt) x100
what is the rule of 70?
used to evaluate long-run growth
divide 70 by the GDP growth rate per year
