Module 1 Flashcards
Gross Domestic Product (GDP)
GDP is the total and gross measure of all goods and services an economy produces within a period (1 year or ¼ year)
It measures the total income earned by the economy and the total expenditure on that economy’s output of goods and services
Income is earned when we turn our factors of production into goods and services
Circular Flow Model
Q: The circular flow model illustrates the crucially important idea of macroeconomics, which is that
Measures the relationship between income and expenditure
On the inner portion of the circular flow, the arrows symbolize the flow of money throughout the market
On the outer portion of the circular flow, we see real flow which is the movement of goods/services from firms to households
A: every expenditure of someone in the economy is exactly equal to the income of another.
The market value of all final goods and services produced within a country in a given time period
Market value: valuing goods and services at their market value. GDP uses the same units to measure goods and services, USD in the United States and GBP in the United Kingdom
Final - Final goods are intended for the end user. Intermediate goods are used in the production of final goods; therefore, GDP only includes final goods as they already embody the value of the intermediate goods used in their production.
Goods and services - GDP includes both the production of tangible goods (such as cars) and intangible services (such as cellphone services).
Produced - GDP includes only currently produced goods and services, not goods produced in the past. That is, transactions involving stocks and bonds, real estate, used books, or used sports equipment will not be included in the current GDP.
Within a country - GDP measures the value of production that occurs within the geographical boundary of a country, whether done by its own citizens or by foreigners located here.
In a given period of time - GDP usually measures production in a year or a quarter-year (three months).
Expenditure Approach
Measures GDP as the total spending on the economy’s output. It consists of consumption expenditure (C), investment (I), government expenditure on goods and services (G), and net exports of goods and services (X – M).
Consumption (C)
Is the total spending by households on new goods (such as cars, food) and services (such as banking services, movies). This does not include the purchase of new housing units, used items or stocks and bonds.
If you buy a used camera from a classified ad, for example, the camera itself is not counted toward the size of the economy because the original purchase of the camera was already recorded in GDP when it was sold new. However, the fee the seller pays to buy a classified ad is counted as consumption, and so is the price the seller pays Purolator to deliver the camera to you
Investment (I)
Is the total spending by households and firms on goods that will be used in the future to produce more goods.
This includes spending on capital equipment, structures, and inventories. Also, it includes household spending on new residential housing units.
Such investments differ from the intermediate goods rule because these investments are not used up when producing goods and services like berries are; (tractor for berry farm, machinery for berry factory).
A household buying real estate is considered an investment, but a household paying rent is counted as consumption. This is because real estate provides you a place to live for years to come, whereas renting is consuming the right-to-live service of the landlord.
Other investments are inventories. While they appear as consumable items, inventory that is not sold can be saved for sale at a later date, thus counting it as an investment
Government expenditures on goods and services (G)
Total spending on goods and services by local, provincial, and federal governments.
It DOES NOT include transfer payments, because they do not represent production. Government purchases do not include financial aid or Old Age Security.
Net exports of goods and services (X – M)
Are the value of exports minus the value of imports. This represents the difference between foreign spending on domestically produced goods and services, and domestic spending on foreign-produced goods and services.
Income Approach
Measures GDP as the total income paid to households by firms for the factors of production they provide. It consists of wages, interest, rental income and profits
Value-added Approach
Looks at all transactions in the economy, and calculates only the value they add to the economy.
This AVOIDS the issue of DOUBLE-COUNTING because it excludes the portion of the transaction that overlaps with previous transactions.
For example, when you purchase a brand new house for 500,000$, you contribute 500,000$ to the GDP of your country. Although, when you sell that house, you do not contribute to GDP because it isn’t a new good, unless you use a realtor to help sell the house. Any fees paid to the realtor to list, show and sell the house would contribute to the GDP of your country.
Nominal GDP
Encompasses increase in GDP by both prices and output
Since we measure GDP using market value (in dollars), inflation can distort the figure when we compare across time periods.
Values output at current prices
Real GDP
Real GDP values current output at the constant prices of a reference base year
Isolates the increase in output for GDP because it adjusts prices in its calculation
Reflects changes in production, and is not influenced by inflation
GDP Deflator
The GDP Deflator is a measure of the change in prices for everything in the country year-over-year
To calculate GDP Deflator, we take nominal GDP and divide by real GDP then multiply by 100
If the result is 100 then the nominal and real GDP are equal, if the result is less than 100 then prices decreased that year and if the result is greater than 100 then prices increased that year
It DOES NOT include imported goods and services, only domestically produced goods and services
How to calculate inflation with GDP Deflator (from two different years)
Take GDP Deflator from 2nd year and subtract GDP Deflator from 1st year then divide by GDP Deflator from 1st year
(GDP Def Year 2 - GDP Def Year 1) / GDP Def Year 1
Uses of GDP
Many economists use GDP to measure the standard of living of different countries and standard of living over time
The main indicator used to calculate standard of living in a country is to take (real GDP/population), this helps us understand long-term trends and short-term cycles of standard of living
