GDP Flashcards
What is GDP?
Because every transaction has a buyer and a seller, the total expenditure in the economy must equal the total income in the economy. GDP measures an economy’s total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.
Therefore, GDP is used as a measure of income and expenditure
What is nominal GDP and how is it calculated?
The nominal GDP is the value of a country’s GDP that is calculated at the current price level (i.e. for each year), which means it’s not adjusted for inflation.
It is calculated by multiplying the price by the quantity for each year
EXAMPLE
Year 2003
Price of burgers = £1
Quantity of hot dogs sold = 100
Price of burgers = £2
Quantity of burgers sold = 50
Nominal GDP = (£1 x 100) + (£2 x 50) = £200
How can GDP be increased?
There are two ways in which GDP can be increased:
- An increase in the PRICES of goods and services
- An increase in the QUANTITY of goods and services
What is real GDP and how is it calculated?
An inflation-adjusted measure that reflects the value of all goods and services produced in a given year, expressed in base-year prices.
By using the prices from the base year, we eliminate the impact that rising prices have on GDP, to get a measure of “real” economic activity
It is calculated by multiplying the base price by the quantity sold each year, ignore the prices of individual years
What is the GDP deflator and how is it calculated?
The GDP price deflator is an economic measure of inflation which measures the difference between real GDP and nominal GDP.
If, for example, an economy has a nominal GDP of $10 billion and has a real GDP of $8 billion, the economy’s GDP price deflator would be derived as: ($10 billion / $8 billion) x 100, or 125. This means that the aggregate level of prices increased by 25% from the base year to the current year.
Calculation:
Nominal GDP divided by
Real GDP
All multiplied by 100
What does the GDP deflator tell us?
It tells us the rise in nominal GDP that is caused by a rise in prices rather than a rise in the quantities produced.
GDP calculation exclusions
- Illegal sales of goods and services (the black market)
- Transfer payments made by the government (i.e. benefits for families)
- Unpaid work such as at home
Why is GDP a bad measure of wellbeing and happiness?
- When natural disasters happen and the country has to be refurbished, the expenditure is included in the GDP calculations, increasing GDP which implies an increase in happiness and wellbeing
- When people get sick and money is spent on their care, this is also included in GDP calculations
- It’s not always clear that a rise in GDP is a good thing, as natural disasters and getting ill are not considered “economically beneficial”
- Standard of living is influenced by crime levels, education levels and equality within a country, none of these are considered in GDP
Why is GDP a good measure of wellbeing and happiness?
GDP is a good measure of economic well-being because people prefer higher to lower incomes
What four components of expenditure is GDP divided into?
- Consumption
- Investment
- Government purchases
- Net exports
What is the income approach to calculating GDP?
Add up all the income earned by households and firms in a single year.
The idea behind the income approach is that total expenditures on final goods and services are eventually received by households and firms in the form of wage, profit, rent, and interest income.
Therefore, by adding together wage, profit, rent, and interest income, one should obtain the same value of GDP as is obtained using the expenditure approach.
What’s the problem with the exclusions from the GDP calculations?
Since GDP is used as a measure of happiness and wellbeing, services produced at home such as looking after an elderly relative is highly beneficial to happiness however these unpaid services have considerable value
Transfer payments from the government are not included but these can have a huge impact on struggling families happiness and wellbeing
