Week 7 (GDP and Economic Growth) Flashcards
Economic Growth
The expansion of society’s productive potential, usually measured by the rate of growth in real GDP.
Business Cycle
Alternating periods of economic expansion and economic contraction relative to the trend rate of economic growth.
Expansion
The period of a business cycle during which total production and total employment are increasing above trend growth.
Contraction
The period of a business cycle during which total production and total employment are falling below trend growth.
Recession
The period of a business cycle during which total production and total employment are decreasing.
Gross Domestic Product measures…
total production
GDP allow us to calculate changes in the price level over time
GDP
Gross Domestic Product (GDP): The market value of all final goods and services produced in a country during a period of time.
GDP allow us to calculate changes in the price level over time
Final good or service
A new good or service which is the end product of the production process that is purchased by the final user.
Intermediate good or service
A good or service that is an input into another good or service.
Types of GDP methods
Expenditure on final goods (ABS)
Value-added measure
The Income method
Value added
The market value a firm adds to a product.
The Income method
The sum of the income generated in the production of goods and services, which includes gross profits, gross wages and other employee payments, income from rent and interest earned.
Four categories of expenditure in GDP
Y = C + I + G + NX
- Consumption (C): Spending by households on goods and services, not including spending on new houses.
- Investment (I): Spending by firms on new factories, office buildings, machinery and inventories, plus spending by households on new houses.
- Government purchases (G): Spending by federal, state and local governments on goods and services
- Net exports (NX): The expenditure on exports minus the expenditure on imports.
Nominal GDP
The market value of final goods and services evaluated at current year’s prices
Real GDP
A measure of the volume of final goods and services, holding prices constant.
Price Level
A measure of the average prices of goods and services in economy.
GDP deflator
A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.
Economic growth rate
The rate of change in real GDP from one year to the next.
(realcurrent - realprevious)/realprevious x100
Potential GDP
The level of GDP attained when all firms are producing at normal capacity.
Which is more important for economic growth: More capital or technological change?
Technological change
New growth theory
New growth theory (endogenous growth theory):
A model of long-run economic growth that emphasises that technological change in influences by economic incentives, and so is determined by the working of the market system
(knowledge capital)
