GDP and Limitations, Real vs Nominal Flashcards
what
what is the gross domestic product?
the market value of all final goods and services produced within a country in a given year
what does the GDP of a country do?
tallies up the value of all the goods and services they produce
what is national accounts?
the system used to measure overall output and expenditure in a country
3 equivalent ways to measure GDP:
- Total spending on domestic
products - Total domestic production
(measured as value added) - Total domestic income
what are the three perspectives on GDP?
- total spending
- total output
- total income
what is the ‘total spending’ perspective on GDP?
-Measure GDP by adding
up every dollar of
spending.
-Highlights who’s doing
the spending, and what
they are buying.
what is the ‘total output’ perspective on GDP?
-Measure GDP by adding
up every dollar’s worth
of output produce.
-Highlights what’s being
made, and by whom. It
helps map the structure
of production.
what is the ‘total income’ perspective on GDP?
-Measure GDP by adding
up every dollar of
income earned.
-Highlights where income
is going, and who’s
enjoying the fruits of all
the economic activity.
what are exports?
goods or services produced domestically and purchased by foreign buyers
what are imports?
goods or services produced overseas and purchased by domestic buyers.
what is meant by ‘value added’?
the amount by which the value of an item is increased at each stage of production
what do green arrows show in the circular flow?
the flow of real resources
what do purple arrows show in the circular flow?
show the flow of money
what does the circular flow show?
- The market value of total output must
be equal to total spending. - Total spending must equal total
income.
➢ Total output, total spending, and
total income are
all equal.
what are the limitations of GDP?
1.Prices are not values.
2. Nonmarket activities —
including household
production — are excluded.
3. The shadow economy is
missing.
4. Environmental degradation
isn’t counted.
5. Leisure doesn’t count.
6. GDP ignores distribution.
what is the shadow economy?
the economic activity purposefully conducted out of view of the government, and, thus, excluded from
GDP
what is nominal GDP?
GDP measured in today’s prices
what is real GDP?
GDP measured in constant
prices.
what does the real GDP measurement allow us to do?
to isolate growth in production that has
taken place.
how is nominal GDP calculated?
by adding up the market value of total production in a year using the current prices prevailing in that year
how is real GDP calculated?
excludes the effects of price changes, so it isolates economic growth that’s due to changes in the quantity of output produced.
what does the consumer price index (CPI) measure?
the overall cost of the goods and services bought by a typical consumer
what are the five stages to calculating CPI?
- fix the basket
- find the prices
- compute the basket’s cost
- choose a base year and compute the index
- compute the inflation rate
what are the problems in measuring the cost of thr living through CPIU?
1) Substitution bias
2) Introduction of new goods
3) Unmeasured quality changes
