Week 1 LT Flashcards
What is GDP
The total market value of all FINAL goods and services produced within a country in a given period of time
What is the production measure of GDP
The number of goods produced within the economy
What is the expenditure measure of GDP
The total purchases in the economy
What is the income measure of GDP
All the income earned in the country
What is the national income identity
Y(GDP) = C(Consumption) + I(Investment) + G(Government Purchases) + NX(Exports - Imports)
Examples of factors contributing to the income approach
Employee compensation, wages, royalties, corporate profits
What is net domestic product
GDP - depreciation = net domestic product
Price deflator formula
nominal GDP / Real GDP
CPI formula
Cost of base year quantities at current prices / cost of base year quantities at base year prices
two problems in measuring real GDP and price level
the relative prices of goods change over time
the quality of goods and services change over time
New goods introduced, old become obsolete
What is the national income accounting equation
Production = Expenditure = Income
What is the largest expenditure in GDP
Consumption e.g. food, housing, cars etc
What accounting characteristic does the income equation have
If one increases another component decreases to balance it
What is the largest component of the income approach to GDP
Compensation of employees
WHat is the typical share of labour and capital in the income approach to GDP
2/3 labour, 1/3 capital
What does no double counting mean in production gdp
e.g. if aa manufacturer makes 10mil of steel and a car company buys and uses it to make 100mil of cars, GDP goes up by 100mil not 110mil
Limitations of GDP - what important factors are not included
Health of nations people - very important effect which is not really reflected in GDP
Doesnt include changes in environmental resources - e.g. extracting oil and selling it increases GDP but nothing to account for the reduction of natural resources and pollution
equation linking nominal GDP and real GDP
nominal GDP = price level x real GDP
What is the Laspeyers index
The method of computing the change in real GDP with the initial prices
What is the Paasche index
the method of computing the change in real GDP with the final prices
Example highlighting the difference between laspeyers and paasche
Laspeyers index using 1960 prices for computers would give a very high weight in thiis category aas computers were much more expensive. paasche index using 2020 prices for computers would have a lower weight
What is the Fisher index
Chain weighted index of real GDP computed as the average of the laspeyers and paasche indexes
what price is used when ccalculating GDP to compare countries
average world prices to account for the fact that goods cost differently in countries e.g. rice cheaper in asia thaat the US
what is the general trend for price levels in ricch vs poor countries
rich countries tend to have higher price level ie higher prices for goods than in poor countries
GDP definition in terms of value added
GDP is the sum of the value added at each stage in the production process
what does real gdp reflect
chaanges in actual production vs price level changes
why is cpi inflation value different to price deflator value
CPI measures only price difference whereas pricce deflator also accounts for changes in quantity
where does the true value of inflation lie
between CPI and price deflator
CPI ignores substitution effect so it overstates inflation
Price deflator is too influenced by substitutes so understates inflation
