Module 2: Measuring GDP and inflation Flashcards
what is GDP?
total $ value of all final G&S produced in a country during a year
why are output and income considered the same?
because whatever spent on a product is income for the ones producing it
is every $ accounted for?
not illegal activities, depreciation etc. Financial services are imputed and electricity is extrapolated
2 examples of things that are not accounted as GDP?
indirect taxes and transfer payments (ex. lottery gains, subsidizes)
2 ways to estimate GDP?
income approach and expenditure approach
3 assumptions made when estimating expenditure approach?
1-furniture bought but not sold on a year accounts for inventory (called inventory expenditure)
2-antiques, etc only account for dealer’s services
3-substracting all imports including in components for produced goods
GDP expenditure formula?
C + I + G + X - M
new change the US made when calculating their GDP?
R&D is now accounted as investment, like machinery
what can make it confusing when comparing GDPs?
some countries have a bigger portion of economy in non formal markets. Oil spills, wars, natural disasters are accounted for so it can be misleading
GDP’s alternatives to calculate more general progress/well-being?
-HumanDevelopmentIndex (accounts for life expectancy, educational attainment…)
-GenuineProgressIndicator (accounts for income distribution, volunteer work, substracts crime pollution…)
real vs nominal GDP?
nominal is GDP valued at current prices, real is GDP without price influence
Formula for GDP delfator?
nominal GDP (current year 2023) / real GDP (base year 2009)
what does the deflator give us?
ratio physical output of 2023 value at 2009 prices
formula to calculate price index?
divide nominal current year by real base year and get let’s say 1.0829. You multiply by 100 and get 8.29% price increase since base year
how do you calculate real GDP?
nominal GDP current year divided by price index
3 main differences deflator vs CPI?
-deflator includes prices of all outputs
-CPI includes prices from imports
-deflator output basket changes every year, CPI every 2
what is inflation?
persistent rise in the general price level
CPI definition?
weighted (relative importance) average of all consumer prices
3 most important categories of CPI?
housing, transportation, food&bev…clothing, recreation, etc
CPI formula?
current cost typical bundle / base year cost of bundle. All multiplied by 100
how to calculate inflation?
is the % change in CPI
2 big problems of CPI when calculating?
-change in relative prices (consumers buy less of expensive and more cheap)
-change in quality (changes in purchasing power. Ex.computer with more power for same price. Index doesn’t go down to reflect the increase, so purch. power has gone up)
how to make CPI less misleading?
measure core CPI (removing most volatile items like food and energy)
biggest inflation costs for economists?
the loss of efficiency because inflation distorts price signals
some examples of distortions due to inflation are ___
people looking for inflation hedges (real estate), business invest less or collect receipts more promptly
infation rate we should aim for and why?
2-3% because if sticky prices, for system to be efficient, relative prices must change through price increases (allow some inflation)
categories when adding up income to calculate GDP? (only production, no bonds/loans)
employees compensation, proprietors incomes, profits, interest incomes, rental incomes
adjustments made after adding up incomes to calculate GDP?
+depreciation
+indirect taxes (sales taxes)
-subsidies
-foreign production
+income paid to foreigners
