GDP (Topic 10) Flashcards
GDP
The market value of all final goods and services produced within a given time period
Money / nominal GDP / GDP at current market prices
GDP cy = P cy x Q cy
What does GDP exclude
1) GDP stresses on the value of final goods
→ Final goods (Goods that are sole meant for consumption)
→ We do not include intermediate goods (goods which are bought for further processing, not for consumption)
→If we include final and intermediate goods, we would be double counting the value of GDP
2) GDP is concerned with only new or current output
Excluded from current year’s GDP:
Old output
→already counted back at the time it was produced
[resale of HDB flat, sale of second hand car]
Paper transactions
→Involves only a change of ownership
[Sales & purchases of bonds and shares]
Purely financial transactions
→Mere transfer of funds
[Monetary gifts by government]
3) GDP excludes certain current output
→ illegal activities (because it is impossible to track)
→Certain non-marketed activities (because no similar product can be found in the market, difficult to put a value to these activities)
[value of housework performed by housewives, do-it-yourself activities]
GDP and GNP
GDP is a geographical concept and measures the value of output produced by factors of production located in the domestic economy, irrespective of who owns them.
GNP is a residential concept and measures the value of output produced by residents, irrespective of whether the goods are produced in the country or abroad.
GNP
GNP = GDP + Net factor receipts
Net factor receipts = Earnings by residents from abroad - Earnings by non-residents in the country
Problem of money GDP
Example, GDP 2015 = P 2015 x Q 2015
This means that a change in the value of output (or GDP) between the two years could be due to
1) a change in price
2) a change in quantity (output)
3) a change in both price and quantity
Society is better off only if the increase in GDP is due to an increase in output (Q) as more goods and services are available for consumption now
Real GDP (1)
Real GDP is a measure of a nation’s output valued at base year price
Real GDP = P by x Q cy
Shows changes of output (Q) alone has changed over time as P is held constant at base year price
Better than money GDP as it indicates whether the country is producing absolutely more goods and services
Real GDP (2)
GDP price deflator is a measure of the level of prices of all new, domestically produced final goods and services in an economy
Broader than CPI as it contains all final goods and services in an economy
Real GDP = money GDP / (GDP price deflator / 100)
GDP price deflator =
money GDP / real GDP
(P cy x Q cy) / (P by x Q cy) x 100
Economic growth rate
Economic growth rate = (Real GDP cy - Real GDP py) / Real GDP py x 100%
Estimating GDP (1)
Output approach
Calculates GDP by adding the values of goods and services produced by the various industries in the economy
Estimating GDP (2)
Income approach
Calculates GDP by adding up all the incomes earned by all the factors of production
1) labour (wages and salaries)
2) land (rent)
3) capital (interest)
4) entrepreneurship (profit)
Estimating GDP (3)
Expenditure approach
Calculates GDP by adding the total expenditures / spendings in goods and services in the economy as a whole
1) C onsumption (household spending on durable goods (except house), perishable items and services)
2) I nvestment (firms’ spending on residential properties (houses), non-residential properties (factories, machinery) and changes in inventories
3) G overnment expenditure (government’s spending on goods and services)
4) Net exports (X -M) (foreign sector)
GDP = C + I + G + (X - M)
National output = national income = national expenditure
Limitations of GDP
1) Not a complete measure of all the country’s output of goods and services
(Illegal activities and some non-marketed activities)
2) Does not indicate the amount of leisure
(If the GDP increased because people work longer hours and have less time for leisure, standard of living has actually worsened, people in the country are worse off
3) Does not adequately reflect the costs of growth
When GDP increases, the cost to society may be high when output is produced, as it may result in more pollution and other social ills
The more output produced, the worse the pollution and other social ills
People will definitely be worse off than before despite the face that GDP increased
4) Does not indicate the improvements in quality of goods
It is impossible to know anything about the quality of the goods available by merely looking at the GDP figure
as GDP merely reveals the value of a country’s output of goods and services.
5) GDP does not take into account how income is distributed
If the increase in GDP goes to only a small segment of the population, then people on the whole are not better off
6) GDP is valued at current market prices
The GDP value will change over time when either price, output or both price and output has changed.
If the increase in GDP is purely because price has increased, then people are worse off
7) Does not take into consideration population growth
Even when GDP increase, people on the average may not be better off if the population has grown faster than the increase in GDP
GDP does not reveal anything about its population growth
Why per capita (real/money) GDP? + limitations
Per capita (real/money) GDP = (real/money) GDP / population
Per capita real/money GDP is a better measure of a country’s standard of living than GDP as it takes into account the population of a country
Limitations
1) it does not indicate every individual’s income, but just the average. Some can earn more than this average while others earn less than this average figure
2) the concept of per capita GDP uses GDP in its calculation. Hence, the same weakness of the concept of GDP also applies
Business cycles
Draw
1) Recession
Declining phase of the business cycle
An economy can be termed to be in technical recession only after it has experienced 6 months (2 quarters) of negative economic growth
Output (real GDP) declines and the unemployment rate rises
2) Through
Lowest phase of the business cycle, turning point of the contraction
Output (real GDP) reaches it minimum after fall during a recession and the unemployment rate is at its highest relative to recent years
3) Recovery
Expanding phase of the business cycle
Output (real GDP) increases and the unemployment rate falls
4) Peak
Highest phase of the business cycle
Output (real GDP) reaches its highest level relative to recent years after rising during a recovery and the economy is closer to full employment
Causes of a recession
1) A decrease in AD
2) A decrease in AS
Increase in production cost
Stagflation, a situation of high unemployment and high prices occurring simultaneously
