GDP Flashcards
What does GDP means?
- “Gross” means “total”.
- “Domestic” means some “geographical boundary”, typically a country’s borders.
- “Product” means “output”.
GDP measures…
The total market value of all final G&S newly produced in a specified country or region during a specified period (e.g. a year or a quarter).
Generally speaking, GDP is a measure of the size of an economy and its composition.
Why are GDP statistics important?
Business and financial companies need to know how big an economy is now and in the near future (i.e., how fast it is growing or contracting) in order to work out:
- how much sale they can make in that economy
- and therefore how much they need to produce and invest.
Why does it matter to be large?
Larger countries have bigger influence in their region and beyond because they:
- Provide a larger market for other countries’ exports
- Afford to make more investment overseas
- Afford to promote its culture and value overseas – soft power (e.g., Confucius Institute, British Council, Alliance Francaise, Goethe Institute)
- Afford larger contributions to international organizations (e.g., IMF, World Bank) and thus have a bigger say in their policies and decisions or even to challenge them
- Afford larger military expenses.
GDP includes:
Newly produced final, market G&S
GDP excludes:
- Intermediate G&S
-
Financial assets
- These are claims on somethings; they are not G&S. E.g., shares are claims on company ownership; bonds are claims on financial payments.
- Informal sector
-
Domestic work
- (services provided by owner-occupied dwellings are included though)
-
Illegal activities (Shadow Economy)
- (practices vary by countries)
GDP Geographical boundaries:
Where – within a specified country (e.g., Australia) or region (e.g., Euro Zone)
- Australia’s GDP excludes production by Australian firms operating overseas
- Exclude imports
GDP time boundaries:
When – during a specified period, e.g., year 2014 or 2014Q3
- 2014 GDP excludes second-hand goods made before 2014
- But include the services of selling second- hand goods produced during 2014
How to Measure GDP?
- Production method
- Income method
- Expenditure method (dépenses)
The three methods are equivalent in principal because:
- The expenditure on a final product is equal to the product’s market value
- A person’s expenditure on a final product is the income of some other persons
- A person’s income is equal to his/her value- add to the final product.
In reality they could be different because of data limitation and measurement errors.
Production method =
Adding up the value added of all domestic producers
Income method =
Adding up the income generated from all domestic production
Expenditure method =
Adding up the expenditures on all domestically produced final G&S
Expenditure approach to GDP (formula):
Y = C + I + G + (X – M)
Y = C + I + G + NX
- Y = GDP
- C = (private) consumption
- I = (private) investment
- G = government purchases
- X = exports
- M = imports
- NX = net exports = exports – imports
Consumption and Investment:
- Consumption: any newly produced G&S purchased by households.
-
Investment: new fixed capital (e.g., machine or factory) + new inventory + new residential houses.
- A new inventory can be considered an investment because it will generate a future return equal to itself (minus any depreciation).
Government Purchases
Include:
- Consumption and investment (e.g., spending on road construction).
Excludes:
-
Transfer payments (TP) like unemployment benefits or pension.
- This is because TP is not consumption as the government does not receive any G&S as a result of making a TP.
Real GDP notes:
- Conceptually it involves fixing the prices at a pre-specified base year, e.g., 1996, so the real GDP in 2012 is measured in 1996 prices.
- Because the prices are fixed at the base year, changes in real GDP over time are entirely due to changes in output volume.
Real GDP growth is output volume growth, not output value growth.
- Unless stated otherwise, GDP always refers to “real GDP” (same for GDP per capita etc.).
GDP deflator =
- GDP deflator is a price index (not a price), so it has no unit (so don’t attach a “$” or “%” sign to it).
- It is a measure of the average prices of G&S produced in the domestic economy in a given year relative to the base year.
- There are many other price indexes (e.g., CPI)
GDP per capita:
- Because GDP is equal to total output of the whole nation, GDP per capita is often seen as a proxy for average output per person even though part of the population like children and retirees do not produce.
Being big is not not the same as being rich!
- Switzerland is small in terms of GDP but rich in terms of GDP per capita
- India is large in terms of GDP but poor in terms of GDP per capita.
- GDP per capita is only an average income measure, it does not consider income distribution within a country.
- There are many rich people in Indians as well as many poor people in Switzerland!
World Happiness Report:
- The United Nations has adopted Bhutan’s holistic approach to development.
- Since 2012, it has published the World Happiness Report, ranking countries based on real GDP per capita, social support, healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.
