GDP and CPI Flashcards
What is gross domestic product?
-GDP is the toal value of all final goods and services produced in the economy during a given year.
-It only includes goods and services sold to final/end users, i.e. intermediate goods and services are not counted.
What are the 3 ways to measure GDP
1) The value-added approach
2) The expenditure approach
3) The income approach
How does the value added approach calculate GDP?
-Focuses on the value added of each producer in the economy.
-Value added=Value of the sales-Value of the purchases of intermediate goods and services.
How does the expenditure approach calculate GDP?
-It adds up expenditure on domestically produced final goods and services by households, firms, governments, and foreign buyers.
-GDP=C+I+G+X-IM
-GDP=C+I+G+NX
-NX=X-IM
-Consumption(C)
-Investment(I)
-Government spending(G)
-Net exports (NX)
-Exports (X)
-Imports (IM)
When calculating GDP, what does investment include? What does it not include?
-It doesn’t include spending on goods that aren’t for present consumption.
-It includes physical investment on infrastructure, machinery, and production plants.
-Financial assets such as bonds, stocks, and mutual founds aren’t included because there is no production involved.
-There are 3 types of investment:
-Business fixed investment - the purchases of capital equipment, machinery and production plants.
-Residential investment -the building of new houses.
-Inventory investment - the change in the quantity of goods that firms hold in storage, including materials and supplies, work in process, and finished goods.
What does government spending exclude?
Government transfer payments. Transfer payments do not affect the demand for goods and services directly. They affect the demand for goods and services indirectly as households have more disposable income.
What does net exports give us an idea of?
-That is the consumption, investment, and government spending that may include imported goods (goods made in foreign countries), and these imported goods should not be included in the country’s GDP.
-Hence we subtract.
-This all helps us to get a more accurate number of what is produced on Canadian soil.
What is consumption?
Spending by households on goods and services
How does the income approach measure GDP? What are the two sources of income?
1) Factor incomes - income earned by factors of production or inputs such as wages, salaries, interest, rent, and business profits.
2) Non-factor payments - the difference between the prices paid for final goods and services and the amount received by production factors before income taxes are removed. Non-factor payments include net indirect taxes, and capital depreciation.
What does GDP tell us? What are the limitations of GDP?
-GDP measures the size of an economy.
-The following items aren’t included in GDP:
1) Inputs and intermediate goods and services. No double counting.
2) Used goods. No double counting. They were already counted in the year from before.
3) Financial assets such as bonds, stocks, and mutual funds. By purchasing stock, you are acting as an owner. You aren’t bringing a good or service to the market (the things GDP seeks to measure).
4) Foreign-produced goods and services. GDP seeks to measure what was produced on our country’s soil.
5) Household production and volunteer work. No money trades hands. These are called “non market transactions.”
6) Underground economy transactions and illegal activities. A drug dealer would never report their income. Grocery stores offering a cash discount make that offer to avoid paying taxes. So it is tough to calculate that through GDP.
7) Harm done to the environment during the production or consumption of goods. Externalities are often not captured in the market.
What does gross domestic product measure vs gross national product
-GDP measures the sum of all final goods and services produced within a country.
-GNP measures the sum of all final goods and services produced by a country’s residents
What is the formula for GNP?
GNP=GDP+(Income earned by Canadians outside Canada-Income earned by foreigners in Canada)
GNP=GDP+Net factor income earned abroad.
Out of all the factors of production, which one results in the most fluctuations of GDP?
Inventory investment is the one that results in the most fluctuations of GDP because firms are the most reactive to that factor.
What is nominal GDP vs real GDP?
Nominal GDP measures the value of all final goods and services produced in the economy during a given year, calculated using the prices in the year in which the GDP is measured.
Real GDP holds price fixed at a base year, which makes it so that changes in quantity reflect the changes in real GDP.
How do you calculate nominal GDP? How do you calculate real GDP?
-Nominal GDP uses the current year prices to calculate GDP.
-Real GDP uses the prices of a base year to calculate GDP.
-When computing real GDP, you hold price constant(keeping it as the base year), and you look at the changes in quantity.
