Measuring Econ. Activity Flashcards
Define GDP
- Measures Total Income of the Economy
- Measures Total Expenditure on Economy’s Output of G+S
Why must Income = Expenditure for an Economy as a whole?
Every Transaction has a Buyer + Seller
What do Market Prices reflect?
Reflect the Value of Goods
What does the GDP count in the measure?
Market Value of All Final G+S produced in a country in a given time period
All G+S Sold LEGALLY in Markets
What type of G+S are Excluded from GDP Measure?
Illicitly Sold G+S
G+S produced at Home
What is the National Account Identity?
Y = C + I + G + NX
Define Consumption
Spending by Households on G+S
What is NOT Included in Consumption?
New Housing
Define Investment
Spending on Capital Equipment, Inventories + Structures
–> Inventory Accumulation
What is New Housing accounted under?
Investment
Define Gov. Spending
Gov. ConsumptionExpenditure + Gross Investment (Public)
Spending on G+S
Who accounts for Gov. Spending?
Local + National Governments
What does Gov. Spending NOT Include?
Does NOT Include Transfer Payments
What are Net Exports?
Exports - Imports
Define Exports
Spending on Domestically Produced G+S by Foreigners
Define Imports
Spending on Foreign G+S by Domestic Residents
Define GNP
Total Income earned by Citizens of a Nation
Who is include in GNP?
Income from Citizens Abroad
Who is Excluded from GNP?
Income form Foreigners
How is GNP Calculated?
GNP = GDP + Net Factor Income from Abroad
What is NNP?
Net National Product
How is NNP Calculated?
NNP = GNP - Depreciation
Why is it Important to distinguish between Real + Nominal GDP?
A Rise in Total Spending may be due to Increased Inflation
–> Output has NOT actually Increased- just Prices
Define Nominal GDP
Production of G+S valued at Current Prices of a given Base Year
Define Real GDP
Production of G+S valued at Constant Prices of a given Base Year
How is the GDP Deflator Calculated?
GDP Deflator = [Nominal GDP / Real GDP] x 100
what are the main Limitations to the GDP Measure?
- Does NOT Account for Income Distribution- INEQUALITY
- Misses Value of Activity Outside Markets- Illicit + Home produced G+S
- Ignores Environmental Impact of Output
Define Inflation
Rise in the Economy’s Overall Price Level
Define Inflation Rate
% Change in Price Level from One Period to the Next
What are the 2 main measures of Inflation?
CPI
PPI
What does CPI Measure?
Overall Level of Prices
How is CPI Calculated?
- Fix a Basket of Goods
- Record Prices at each Time Interval
- Find Cost of Basket + Measure Changes
- Choose a Base Year
- Compute Inflation Rate
What is PPI?
Producer Price Index
What does PPI Measure?
Cost of Basket of G+S bought by Firms
What are the 4 main problems with CPI?
- Substitution Bias
- Intro of New Goods
- Unmeasured Quality Change
- Individual Spending Patterns may NOT be Typical
Why is Substitution Bias a Problem for CPI?
Prices of G+S do NOT change proportionately
–> Consumers may Substitute to relatively less Expensive Goods that are NOT in the Fixed Basket
Define GDP Deflator
Ratio of Nominal GDP : Real GDP
What does GDP Deflator reflect?
Reflects Prices of ALL G+S produced Domestically
What does GDP Deflator Compare?
Compares Prices of Currently Produced G+S to Price of same G+S in Base Year
What do CPI/PPI reflect?
Reflects Prices of G+S bought by Consumers + Firms
What does CPI/PPI Compare?
Compares Price of Fixed Basket of G+S to Price of Basket in Base Year
What is the main issue with CPI/PPI?
Basket NOT Updated Automatically over time
What is RPI + How is it Calculated?
Retail Price Index
RPI = CPI + Council Tax + Mortgage Interest Payments
What’s the Main Difference between GDP Deflator + CPI?
CPI reflects Prices of Foreign Goods as well
- e.g. Increased Oil Prices –> Greater Increase in CPI than in Deflator
- -> Because Oil makes up larger proportion of Consumer Spending then of GDP
How do you Account for Inflation?
Value of Today’s £ = Value in Year T £ x [Price Level Today / Price Level in Year T]
What does Indexation reflect?
Reflects Real Purchasing Power at that Moment in Time
