notes i measurements GDP

Question 1

GDP

Def

Answer 1

GDP

Def
Total value of the final G&S produced in a country during a given period of time, regardless of ownership of factors of production

Market activity

Flow

Specified region:
X Overseas Aud individuals or companies
√ within region 
Ownership not important
International company’s factory in Aus

Question 2

GDP

WHY
Final G&S

Answer 2

Concerned with production of final G&S

Avoids double counting intermediate goods in production

Does not count goods produced in past & resold today
e.g. 2nd hand cars, shares

Question 3

GDP

Use 5

Answer 3

Material well being

Document changes & pace in economic activity
e.g. boom, recession

International comparisons

Composition of production, expenditure, income

Change in employment
Hours worked, productivity

Question 4

🍡 Income method

equation

Answer 4

GDP: Y

= wL + rK
= wagehours + rentcapital
= labour income + capital income

Question 5

🍡 Expenditure method

equation

Answer 5

🍡 Expenditure method

Y
= C + I + G + X – M

Participants in economy:
Household sector
Conumsption C
Business
Investments I
Government
G
X transfer payments (old age pension)
Overseas
Exports – Imports X–M

Question 6

🍡 Production method

def

equation

Answer 6

Value added approach by sector/ industry
Sum up amount of value added by all producers in economy
Rev – Cost of production

Avoid intermediate, double count

Question 7

method equivalence

Answer 7

Equivalence
in methods

Production method = Expenditure = Income

Production = expenditure any period
Even if not all produced is purchased
Unsold inventory (production) treated as investment (expenditure)

Question 8

Nominal GDP

def

equation

Answer 8

Nominal GDP

Measure of GDP in which quantities produced are valued at current year prices
current dollar value of production

https://docs.google.com/document/d/1WIwl9T6FmVxcMc-qnBg3TfHLHmbJihHzzOFjVzM8F3k/edit#

Question 9

Nominal GDP

cons

Answer 9

X useful for comparison

Captures change in both price and quantity

Can’t isolate

Question 10

Real GDP

def

Answer 10

Real GDP

Quantities produced are valued at prices in a base year rather than at current prices
measures actual physical volume of production

Use base year prices to calculate value of output in given year
Nominal GDP adjusted for change in average price level

Same as nominal if
the current period and base or reference period are the same

Mirrors CPI
Here: holds price constant & changes q
CPI: holds q (basket) constant & changes p

Question 11

real gdp

Pro & Cons

Answer 11

Pro & Cons

Pros
Simple, intuitive
Capes change in economic activity overtime

Cons
X reflect product composition over time
e.g. changes in preference, new goods introduced, shift in consumption to less expensive goods (energy -> solar)

Question 12

traditional gdp

formula

Answer 12

https://docs.google.com/document/d/1WIwl9T6FmVxcMc-qnBg3TfHLHmbJihHzzOFjVzM8F3k/edit#

Question 13

modern gdp

formula

Answer 13

https://docs.google.com/document/d/1WIwl9T6FmVxcMc-qnBg3TfHLHmbJihHzzOFjVzM8F3k/edit#

Question 14

Measure of Welfare
&
Alternatives

Answer 14

Measure of Welfare

Yes:
Increase GDP = increase education, health outcomes
Typical, causal relationship
Increase productivity = increase range of opportunities = increase happiness
Strong correlation
Low-middle income countries

No:
X account leisure 
happiness, quality of life
X non-market activities 
e.g. volunteer, unpaid
X environmental resource depletion
Increase GDP= increase economic damage/ decrease resource welfare
X poverty, inequality
Distribution of economic activity

Alternatives:
HDI, human development index
Health, education, income
HILD Household income labour development
Rate happiness

Question 15

Scale by GDP

Answer 15

Scale by GDP

Comparing countries, often scale variable by / GDP

Economics vary a lot by size, due to population
X make sense to compare LEVEL of gov spending
e.g. China = large economy = ↑gov spending v.s. Nepal = small economy = ↓gov spending
√ makes sense to find ratio of variable spending to GDP total spending
Standard measure, scaling by population, per capita

Question 16

Aus vs China

Answer 16

Aus vs China

There is a close relationship between the Australian and the US economy. During the 1990s, economists at the Reserve Bank of Australia estimated that the most determinant of Australian GDP growth, was growth in the USA. Do you think this relationship is a causal relationship? That is, does growth in the USA create growth in Australia or vice versa? Without studying international macroeconomics in detail, what possible mechanisms do you think could explain a close relationship between real GDP growth in Australia and the USA?

There are a number of plausible mechanisms via which US economic activity could affect Australia:

(a) International trade - the US will demand more goods and services produced in Australia when the economy is growing rapidly. This increase in demand for Australian exports will tend to increase Australian economic activity.
(b) Confidence or animal spirits - it is possible that confidence is an important determinant of economic activity. If the US economy is booming, it is plausible that this optimism will spill over to the Australian economy.
(c) Technological transfer - it is possible that technologies developed in the US will increase productivity or demand in the US will able to be transferred to Australia. If so, there could be a similar increase in output.

Question 17

gdp

Market value

Answer 17

Market value
Price
Aggregate across range of G&S by considering market value

Gov production
Valued at cost of production because on market price
X household production e.g. cleaning, cooking
X underground economic activity e.g. criminal