Macroeconomics – Quiz 4 – part 1 – GDP and production – Flashcards
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GDP
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the total market value of all final goods and services produced in the economy in a given year
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why are market prices used?
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to standardize value across the range of goods and services measured in macroeconomics
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why are only final goods counted?
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in order to avoid double counting, we do not count intermediate goods (goods used in the production of final goods)
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expenditure approach formula
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Y = C + I + G + NX C = consumer spending I = investment G = government expenditure NX = net exports
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consumer spending (C)
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any spending done for enjoyment or pleasure ex) a car for enjoyment, television purchase, etc
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investment (I)
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any spending done for the purpose of production ex) a truck for deliveries, advertising, machinery for manufacturing
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government expenditure (G)
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any spending for the purpose of governance ex) stationery, materials to build government offices
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net exports (NX)
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the total value of exports minus the total value of imports NX = X - IM
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income approach formula
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Y = w + i + r + π w = wages i = interest r = rent π = profit
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wages (w)
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any money paid for the services of labor
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interest (i)
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any money paid for the use of capital such as machinery, intellectual property, etc
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rent (r)
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the money paid for the use of land or other resources
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profit (π)
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any money paid to owners of companies after a firm has paid its expenses (i.e. shareholders)
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value added approach to GDP measuring
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the sum of the market value added between each step of production as intermediates are added
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gaps in productivity missed by GDP (2)
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1. household production 2. underground production
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Crucial failings of GDP (4) (things it fails to measure)
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1. leisure (i.e. amount of leisure time enjoyed) 2. environment (i.e. pollution) 3. crime / social problems 4. distribution (i.e. income, wealth distribution)
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nominal GDP
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the value of GDP presented in current year figures
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real GDP
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adjusted for price changes by adjusting GDP against a base year - the base year is typically 2002, the year chosen by StatsCan
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chain-weighted GDP
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effective way to measure GDP that we don't have to know :)
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simple nominal GDP calculation
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nominal GDP = sum( current P * current Q)
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simple real GDP calculation
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real GDP = sum (base year prices * current year quantities)
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GDP deflator calculation
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GDP deflatort = (nominal GDPt / real GDPt) * 100
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what does GDP deflator measure?
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it measures the price increase, while keeping the quantities fixed at the base year quantities.
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other measures of total production (4)
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1. gross national product (GNP) 2. national income (NI) 3. personal income (PI) 4. personal disposable income (PDI)
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Gross national product (GNP)
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identical to GDP except it includes production made by domestic companies in foreign countries (domestic firms producing in foreign countries) note: excludes domestic production by foreign firms
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national income (NI)
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GDP minus the depreciation of fixed capital - depreciation is known as the consumption of fixed capital
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personal income (PI)
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all household income, including government transfers; it does not include the revenue kept by corporations
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personal disposable income (PDI)
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personal income minus personal income tax - the best measure of how much households have to spend on goods and services (disposable income)
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business cycle
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the alternating periods of economic expansion and recession
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business cycle effects on employment & production
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expansion: production and employment rise recession: production and employment fall
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gross domestic income (GDI)
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GDP calculated as the sum of income payments to households
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employment conditions
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1. short run unemployment affected by business cycle 2. long run unemployment affected by other factors
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real GDP calculation
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sum (base price * current year quantity)
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nominal GDP calculation
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sum (current price * current quantity)
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GDP deflator
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(nominal GDP / real GDP) * 100
