GDP and the Measurement of Progress Flashcards
Definition of Gross domestic product
Gross domestic product is the market value of all final goods and services produced within a country in a year.
Definition GDP per capita
GDP divided by a country’s population
Definition intermediate goods and services
Intermediate goods and services are sold to firms and then bundled or processed with other goods or services for sale at a later stage.
Definition final goods and services
Goods and services which are sold to final users and then consumed or held in personal inventories.
Why does GDP not include sales of used goods?
GDP is meant to measure production
Definition Gross national product
GNP is the market value of all final goods and services produced by a country’s permanent residents, wherever located, in a year.
What’s the difference between GNP and GDP?
GDP measures the total value of goods and services produced within a country’s borders, while GNP measures the total value of goods and services produced by a country’s resident, regardless of location.
What does the growth rate of GDP tell us?
Growth rate of GDP tells us how rapidly the country’s production is rising of falling over time.
How do you calculate the growth rate of GDP?
To compute the growth rate of GDP from 2024 to 2025 you only need two numbers: GDP at the end of 2024 and at the end of 2025. Then just calculate the percentage change:
((GDP2025 - GDP 2024) / GDP2024) x 100
What’s the difference between nominal and real GDP?
Nominal growth rate does not adjust for price changes, whereas the growth rate of real GDP does.
Definition of Nominal GDP
Nominal GDP is calculated using the prices at the time of sale.
When wanting to compare GDP over time, is it better to use real GDP or nominal GDP?
If we want to compare GDP over time, we should always compare real GDP.
Definition GDP deflator
The GDP deflator is a price index that can be used to measure inflation.
How is the GDP deflator calculated?
The GDP deflator is simply the ratio of nominal to real GDP multiplied by 100:
GDP Deflator = (Nominal GDP/ Real GDP) x 100
Definition Recession
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Define business fluctuations/ business cycles.
Business fluctuations or business cycles are the short run movement in real GDP around its long-term trend. Defining when a recession begins and ends is not always obvious, in part because economic data are often revised over time.
What are the two most common ways of splitting GDP?
National spending approach to GDP:
Y = Consumption + Investments + Government purchases + Net Exports
Factor Income approach to GDP:
Y = Wages + Rent + Interest + Profit
Define Consumption spending
Private spending on final goods and services. Most are made by households.
Define Investment spending
Investment spending is a private spending on tools, plant, and equipment that are used to produce future output.
Define government purchases
Government purchases include spending on tanks, airplanes, office equipment, and roads, as well as spending on wages for government employees.
Define Net exports
Net exports are exports minus imports
Why do economists split GDP?
Each of the ways of splitting GDP throws a different light on the economy.
Economists who study business fluctuations are often interested in splitting GDP according to the national spending identity because consumption, investment, government purchases, and net exports behave differently over time.
Why is the factor income approach to splitting GDP useful?
The factor income approach is useful if we are thinking about how economic growth is divided between employee compensation, rent, interest, and profits
What are the 4 underlying problems with using GDP as a measure of output and welfare?
- GDP does not count the underground economy
- GDP does not count nonprice production
- GDP does not count leisure
- GDP does not count bads: Environmental Costs
- GDP does not measure the distribution of income
Why are underground market transactions bad when using GDP to measure output and welfare?
Because they are omitted from GDP. Nations with a great deal of illegal and off-the-books activities are not as poor as they appear in the official GDP statistics.
Why does GDP not accounting for nonprice production lead to problems when measuring output and welfare?
Non-price production occurs when valuable goods and services are produced but no explicit monetary payment is made.
