Lec 1 - GDP Flashcards
Macroeconomics definition
the study of individual national economies and/or the global economy. The study of the whole economy in aggregate terms.
Macroeconomic issues
what are the three major ones?
Economic growth
Unemployment
Inflation
Role of government
Government macroeconomic policy is used to control various intermediate variables, which can directly affect businesses as well as the environment in which they operate: • Interest rates • Money supply • Taxes • Government expenditure
Macroeconomic policy challenges
what are the five major ones?
- Boosting economic growth
- Reducing unemployment
- Keeping inflation low
- Stabilising the business cycle
- Reducing government and international deficits
GDP definition
Gross Domestic Product: the market value of all final goods and services, which were produced in a country, in a given time period.
A flow variable which can be calculated using the expenditure approach or the income approach.
Nominal GDP definition
The value of final goods and services, produced during a given year, when valued at the prices that prevailed in that same year, whether due to economic growth or inflation.
Real GDP definition
The value of final goods and services, produced during a given year, when valued at the prices of a reference base year.
Real GDP per capita definition
The value of goods and services that the average person can enjoy while removing the influence of changing prices and cost of living.
Potential GDP definition
The value of production when all the economy’s labour, entrepreneurial ability, capital, and land are fully employed.
Purposes of real GDP per capita
What are the three main purposes?
- Compare standard of living over time
- Compare standard of living across countries: real GDP of one country must be converted into the currency of the other; goods and services in both countries must be valued at the same price.
- Business cycle forecasts: the fluctuations in economic activity measured by real GDP tell a reasonably accurate story about the phase of the business cycle that the economy is in.
Living Conditions & GDP
There are two features of expanding living standards:
• Growth of potential GDP per person
• Fluctuations of real GDP around potential GDP
Potential GDP grows at a steady pace because the quantities of factors of production and their productivity grow at a steady pace.
Business cycle definition
A periodic but irregular up-and-down movement of total production and other measures of economic activity.
• Expansion: a period during which real GDP increases − from a trough to a peak.
• Recession: a period during which real GDP decreases – from a peak to a trough; its growth rate is negative for at least two successive quarters.
Purchasing power parity
Prices of particular products in one country may be much less or much more than in the other country; the exchange rate may be a poor indicator of the purchasing power of the currency at home.
Exchange rate between two currencies is equal to the ratio of the currencies’ respective purchasing power.
However, it is difficult to find comparable baskets of goods to compare purchasing power across countries.
Limitations of real GDP
Real GDP measures the value of goods and services that are bought in markets.
GDP thus omits several factors:
• Household production
• Underground economic activity & illegal goods: amount of underground activity varies by country.
• Leisure time
• Environmental quality
• Health and life expectancy
Influence of real GDP on wellbeing
There are positive correlations between income and life expectancy, income and literacy, income and HDI.
But there is also positive correlation between income and carbon dioxide emissions.
The Easterlin paradox
The question of whether money can buy happiness.
There is a positive association between income and happiness within a country at a specific time. However, this association breaks down between countries and over time within the same country.
Happiness is a function of expectation: there are diminishing returns to money.
Consideration should be made to relative income as an important factor in this question.
Circular flow of expenditure and income
Firms pay income (Y) to households (via the factor markets).
Households make consumption expenditure (C) to goods markets.
Governments purchase goods and services (in the goods market).
Rest of the world buys net exports (in the goods market).
Firms make investment (in the goods market).
I, C, G and X-M flow to firms.
Circular flow without government and international trade
In the circular flow model of an economy with no government sector and no international trade, households receive income from producers for the use of factors in the factor markets.
Savings
Income left after paying taxes can either be consumed or saved.
Saving adds to wealth.
Saving is a flow variable.
Net domestic product formula
NDP = GDP - depreciation
Financing investment
What two things is investment financed by?
Investment is financed by national saving and borrowing from the rest of the world.
Capital definition
Capital refers to the plant, equipment, buildings, inventory of raw materials and semi-finished goods.
Does not include the company’s workforce.
GDP deflator formula
GDP deflator = (nominal GDP/real GDP) x 100
Chained volume measure method
A method of measuring real GDP, based on calculating the growth rate of real GDP from one year to the next using prices from the first of the two years.
Transfer payments definition
A type of government outlay.
Not part of expenditure on goods and services because they do not represent the purchase of a final good or service.
Depreciation definition
The decrease in the capital stock because of wear and tear.
If the economy’s capital stock decreases over time, depreciation exceeds gross investment.
Investment in the national accounts example
A vehicle purchased by a UK citizen who intends to use it for their work.
Not purchase of foreign bonds at London stock exchange, UK government bond or protected historic sites.
Stock variable definition
A quantity that exists at a point in time.
EG. the number of DVDs available at the library.
Flow variable definition
A quantity per unit of time.
Factors of gross operating surplus
Profits paid as dividends and undistributed profits are included in the category of gross operating surplus when measuring GDP.
Income received by the proprietor of an owner-operated business is not.
Rental income definition
Money received from rental of inputs: not limited to just land.
