GDP Flashcards
What does it measure?
Total income of a nation
Measure of both:
Total income and total expenditure of producing
Income = Expenditure…
as every transaction has both a buyer and a seller
GDP =
Consumer spending + Gov’t spending + Investment spending + (exports - imports)
Definition
“GDP is the market value of all final goods and services produced within a country in a given period of time”
“Market value”
Use of market prices to translate the many different goods/services available to a single measurement
- Market prices = Amount people are willing to pay
- The more expensive a good the more weighting it is given in GDP
Excludes:
- Products produced and sold illegally
- Products both produced and consumed at home
- Work carried out by members of the family
- The sale of used items
- Items produced outside the borders of a country
“final”
Final goods = Are consumed
Intermediate goods = Used as inputs in the production of other goods (If produced for a later date then counted as final until used)
“in a given period of time”
Usually a year or a quarter
- For a quarter it is presented as an annual rate (multiplied by 4) and subject to seasonal adjustment
The components of GDP
GDP= C + I + G + Nx
Consumption (C)
= Spending by households
Investment (I)
= The purchase of goods which will be used in future to produce more goods/services
Inc:
- Products produced but not sold immediately
- Capital equipment, inventories, and structures
Government spending (G)
= Spending on goods/services by local and national gov’t
Net exports (Nx)
= Exports - imports
GDP per capita
= GDP/Population
= Average national income per head
Real GDP
= Is not affected by changes in price
= Output x Prices in base year
- Disregards inflation; shows how overall production has changed over time
A nominal increase
= An increase in prices
- Combination of both increased output + inflation
The GDP deflator
= A measure of price level in comparison to price level in base year (shows how much inflation has occurred)
= Nominal GDP/Real GDP x 100
GDP + Economic well-being
- Shows income and expenditure of average person (higher = happier)
- Does not truly reflect quality of life but higher GDP makes it easier to obtain things which can improve this
- Des not show distribution of income
Consumer prices index
= Measures the overall prices of goods + services bought by the typical consumer (an increase = Inflation)
- Shows the cost of living
Inflation rate = 100x(CPI yr2 x CPI yr1)/CPI yr1
Producer prices index
= Measures prices of goods + services bought by firms
- Reflects changes in CPI as higher cost to firms usually means higher costs to consumers
Problems with CPI
- Substitution bias
- Prices do not all change the same, consumers respond to this by substituting more expensive goods for cheaper ones - Introduction of new goods
- Greater variety may cause consumers to turn to cheaper alternatives
- New goods and services which can reduce household expenditure are not immediately taken into account - Unmeasured quality change
- If quality rises but price doesn’t consumers will get more for their money - Inflation can disproportionately affect some people more than others
The GDP deflator vs CPI
= Both used to show how quickly prices are rising and often give similar results
But:
- GDP is goods produced, CPI is only the ones typically bought
- Popular imported goods only show up in CPI (eg. oil)
- CPI is a fixed basket of goods, GDP is constantly updated
Correcting for the effects of inflation
Amount in today’s £ = Amount in yrT’s £ x (price level today/price level yrT)
