Week 1 Flashcards
What is GDP?
A summary measure of the aggregate economic growth in a given period of time
What does GDP stand for?
Gross-Does not factor in depreciation
Domestic-Activity in economy regardless of ownership
Product-Value of production of final goods and services
What other methods are there to measure aggregate economic growth besides GDP?
GDI (Income)
GDE (Expenditure)
What is used to value goods and services for GDP?
Market prices/value
What is not included in GDP?
Non-market economic activity
- Home production
- Black market
How are government services valued for GDP?
At cost as they have no market price
Why does GDP only count final goods?
To avoid double counting intermediate goods used in production
What are final goods?
A final product ready for sale that is used by the consumer to satisfy current wants or needs
What are intermediate goods?
A product used to produce a final good or finished product
What economic activity is not counted per period?
Goods manufactured in a pervious period (second-hand)
Purchases that aren’t goods and services (financial assets)
Why do all three methods of measuring GDP give the same answer?
output sold at market price=expenditure
expenditure at output=income to producers (capital or labour)
What about good produced but not sold?
They are counted as inventory accumulation and are counted as expenditure
What is the role of households in an circular economy?
They own factors of production (labour and capital)
They receive income and and supply labour and capital from firms
What is the role of firms in a circular economy?
They use factors of production to produce goods and services.
They receive revenue when selling goods and services to households
What is the formula for the Income approach to GDP?
Y=wL+rK
Y=Aggregate income
wL=Wage income
rK=Capital income
What is the formula for the Expenditure approach to GDP?
Y=C+I+G+(X-M)
Y=Aggregate Income (GDP)
C=Private Consumption
I=Private Investment
G=Government Purchases
(X-M)=Net Exports=Exports-Imports
What counts towards private consumption?
Consumption of new durable and non durable goods and services
What counts towards private investment?
Includes structures, equipment, and R&D software
What counts towards government purchases?
Government purchases of goods and services, not transfers. Different from government spending
What is the formula of the National Income Accounting Identity?
Y=C+I+G+X-M
or
Y+M=C+I+G+X
(Y+M)=sources
(C+I+G+X)=uses
What does GDP not measure?
Non market activity
Things valued at anything other than market price
Income distribution
Resources used up (natural resources)
What is nominal GDP?
GDP over a specific period of time for 1 country
What is the formula for nominal GDP?
Nominal GDP=Real GDP (Quantity index)*GDP deflator(Price Index)
What is the traditional approach of finding real GDP?
Use base year prices to calculate value of output in a given year
What are the pros and cons of the trad method of finding real GDP?
Pros
- simple
- captures changes in economic activity over time
Cons
-base years might not reflect changing economy
Formula of nominal GDP at year 0 (trad)
p=price
i=goods
t=time
GDP0=p10q10+p20q20+…pi0qi0
Formula of real GDP at year 0 (trad)
p=price
i=goods
t=time
GDPt=pi0qit…/pi0qi0…
How do you use modern approach to get real GDP?
Using chain-weighting to avoid prices getting outdated
