Week 1 Lecture 2 - Measuring Income And Well-Being Flashcards
What is Gross Domestic Product (GDP)?
GDP measures the total income of everyone in an economy or equivalently, the total expenditure on everything (output of goods and services) in the economy
What is the relationship between income and expenditure in an economy?
Income must equal expenditure in an economy because every transaction has a buyer and a seller
Give the formal definition of GDP
GDP is the market value of all final goods and services produced within a country in a given period of time
What items does GDP include?
-GDP includes all items produced in an economy that are sold legally in markets
- GDP excludes most items that are produced and sold illegally and items that are produced and consumed at home
What type of goods are included in GDP as GDP only counts the final market value of goods?
The value of intermediate goods is already included in the prices of the final goods so intermediate goods are excluded when measuring GDP to avoid double counting except when the intermediate goods are not sold but added to inventory
State the formula for calculating GDP and differentiate between each of its components
Y = C + I + G + NX
- C is consumption
- I is investment
- G is government spending/purchases
- NX is net exports
What does the component C include?
Consumption includes:
- Spending by households on goods and services
What does the component I include?
Investment includes:
- Spending on capital equipment and structures
- Household purchases of new housing
- Inventory accumulation
What dose the component G include?
Government spending includes:
- Government consumption expenditure and gross investment
- Spending on goods and services by local and national governments
- Does not include transfer payments as these do not increase income, they just re-distribute it
State the formula for calculating net exports (NX)
NX = Exports - Imports
- Exports is spending on domestically produced goods by foreigners
- Imports is spending on foreign goods by domestic residents
What is gross national profit (GNP)?
- GNP is a measure of the total income earned by UK nationals, so it includes income that UK citizens earn abroad and excludes the income that foreigners earn in the UK
- GNP = GDP + Net factor income from abroad
What is nominal GDP?
Nominal GDP is GDP which has not been adjusted for inflation (the value of goods and services produced at current prices)
What is real GDP?
Real GDP is GDP which has been adjusted for inflation (goods and services valued at constant prices of a given base year so quantities are changed but prices are fixed)
What is the relationship between nominal and real GDP during the base year?
In the base year Nominal GDP is always equal to Real GDP
What is the GDP deflator?
The GDP deflator measures the current level of prices relative to the level of prices in the base year
State the formula used to calculate the GDP deflator
GDP deflator = Nominal GDP/Real GDP*100
What is the difference between calculating nominal and real GDP?
When calculating nominal GDP we use the respective quantities and prices for the year we are calculating GDP for whereas when calculating real GDP we use the respective quantities for the year in question but we always use the price of the base year for every single year we calculate real GDP for
Define the term inflation rate
The inflation rate is the percentage change in some measure of the price level from one period to the next
State the formula used to calculate inflation from GDP deflators
Inflation = GDP deflator in year 2 - GDP deflator in year 1 / GDP deflator in year 1 *100
State the equation for calculating Real GDP per person
Real GDP per person = Real GDP/Population size
What does Real GDP per person measure?
Real GDP per person measures average economic well-being in the population
