Week 14 - GDP Flashcards
How does GDP allow for measuring real economic growth (REMOVE? idk where I got this??)
It isolates the effect of production from changes around price.
Gross domestic product (GDP)
The market value of final goods and services produced by a country over a given period of time, usually a quarter of a year.
It is used to measure the output of an economy.
Criticisms of GDP
GDP has been criticised as it does not reflect factors such as income distribution or the effect of economic growth on the environment.
Domestic
Domestic in terms of GDP means activity is measured within a country’s borders. Nationality of the owner or a company is not relevant.
It also only counts value produced within the set time frame. E.g., if a 20 year old £200,000 house is sold with £12,000 paid for commission, only the value of the commission is counted as the house was not produced in the time frame.
What are the 3 methods of measuring GDP
GDP by production, GDP by expenditure and GDP by income.
GDP by production
GDP by production measures GDP by finding the total market value of all final goods and services produced in a country over a period of time.
The market value of a good is the price of the good/service * quantity produced
GDP by production can also be measured by finding the total value of goods/services - total value of intermediate goods.
Final and intermediate goods and services [GDP by production]
A final good is the good consumed by the end user.
An intermediate good is a good used up during the production of a final good.
Intermediate goods are not included in GDP to avoid double counting as they are both the intermediate good itself and is a part of a final good.
Capital goods [GDP by production]
A capital good is along lasting good that is not a final product or used in a final product like consumer goods. Capital goods are instead used to help in the production other goods or services.
E.g., machinery, equipment, infrastructure or vehicles.
Public goods [GDP by production]
Public goods are goods that are not sold in markets and are instead provided for anyone to be able use. They are often provided by the government (the public sector) and provide social benefits such as infrastructure, parks, street lighting, basic research, communications.
How are public goods measured when finding GDP by production
Because public goods are not sold on a market, you cannot find their market price. Instead they are valued by the cost of providing the good.
Pros of GDP by production
GDP by production can help to identify which sectors contribute most and least to GDP.
This can also make it useful for understanding economic structure and productivity.
Cons of GDP by production
It relies on getting accurate data from all sectors which can be difficult.
It can be difficult to measure the value of informal or non-market activities such as public goods.
GDP by expenditure
GDP by expenditure measures GDP by finding the total spendings from the 4 categories of final goods/services - Consumption (C), Investment (I), Government Spending (G), Net Exports (NX). Net exports is Exports (X) minus Imports (M)
It has the equation:
Y = C + I + G + NX
Where NX = X - M
Consumption spending [GDP by expenditure]
Household spending on goods and services (e.g., food, rent, healthcare, cars)
It can be split up into durables, non-durables and services.
Durables: long lived consumer goods.
Non-durables: short lived consumer goods.
Services make up most of consumer spending.
Investment spending [GDP by expenditure]
Spending by firms on final goods and services aimed at increasing production capacity of economy.
Can be split up into business fixed investment, residential investment and inventory investment.
Business fixed investment: purchases of new capital goods.
Residential investment: construction of new homes and apartment buildings.
Inventory investment: the change in unsold goods to the company’s inventory.
Government spending [GDP by expenditure]
Purchases of final goods and services bought by federal, state, and local governments.
Government spending excludes transfer payments (are payments made by government, but where the government receives no current goods or services).
Net exports [GDP by expenditure]
Net exports is the total value of exports (goods and services sold to other countries) minus the total value of imports (goods and services bought from other countries).
Imports are subtracted since they are not produced domestically.
Pros of GDP by expenditure
Useful for analysing consumer, business and government spending trends.
Helps measure how trade impacts GDP
Provides a clear picture of demand-side economic activity.
Cons of GDP by expenditure
Difficult to get data on informal and unreported transactions so these are often unincluded or misrepresented.
Data collection needs to be accurate and timely.
Might not reflect wealth distribution or quality of economic growth.
GDP by Income
GDP by income measures GDP by summing the total labour income and capital income.
Labour income: wages, salaries, benefits, and incomes of the self-employed.
Capital income: Business owner profits, rent for land, interest for bond holders, royalties.
Real GDP vs Nominal GDP
Nominal GDP measures GDP by using values of products at current year prices to measure the current money value of production.
Real GDP measures GDP by using values of products for a base year instead of the current year prices. Real GDP measures actual physical volume of production.
Using real GDP to compare GDP over time.
Real GDP is often used to be able to compare GDP over time, while adjusting for inflation. This is done by setting a base year to keep prices constant, allowing for direct comparison of GDP.
Trends in real and nominal GDP
Real and nominal GDP usually increase each year.
If nominal GDP increases but real GDP decreases, this shows that fewer goods/services were produced and that price increased faster than output decreased.
If the current year prices are less than the base year prices, real GDP will decrease. This is usually true for years before the base year.
Real GDP can rise while nominal GDP falls however this is rare. It indicates that prices are falling faster than the increase in output.
GDP representing wellbeing [criticism of GDP]
If a country has a high well-being where people can take time off for leisure and wellbeing, this is not captured by GDP. GDP only captures goods and services priced and sold on markets.
This means that GDP does not represent the wellbeing of a country as a high GDP does not necesarily mean a high national wellbeing.
Increased leisure time can make GDP seem smaller as GDP values leisure time at 0. However increased leisure time can increase the national wellbeing of a country.
GDP also does not account for crime rates, congestion, sense of community or open spaces an area has which add to quality of life and wellbeing but does not effect markets.
GDP representing nonmarket/ underground economic activities [criticism of GDP]
GDP does not value activities that are not traded in markets like household production and volunteer services, even though nonmarket activities are often important in poorer countries.
GDP cannot value underground economic activity (legal or illegal unreported transactions).
GDP representing environmental quality [criticism of GDP]
GDP values activities such as environmental clean up but not how the economy impacts the environment.
This means that a factory can cause a lot of pollution and hire a company to it clean up. Even if the environmental quality has a net decrease, GDP will have increased from the service provided by the clean up company but will not be affected by the damage caused by the factory.
GDP does not account of the depletion of natural resources however will increase when these resources are sold.
GDP does not represent the damage done to the environment, only the economic benefits from the damage.
GDP representing poverty and inequality [criticism of GDP]
GDP does not capture how income is distribution between the population or the percentage of people in a country that are considered in poverty.
A country can have the same GDP even if most the wealth held in the top 1% and if the wealth is spread fairly across the population.
