Macroeconomics: Chapter 20: Measuring GDP & Economic Growth

The business cycle

Fluctuations in the pace of expansion of real GDP. Irregular up and down movement of total production and other measures of economic activity. Cycles have 2 phases: -Expansion (growing) (Real GDP increases) -Recession (shrinking) (Real GDP decreases) And 2 turning points: -Peak (Top) (where an expansion ends and recession begins) -Trough (bottom) (Where real GDP reaches temporary low point and from where expansion begins.)

GDP

(Gross Domestic Product) -The market value of the FINAL goods and services produced within a country within a given time period, also measures total income and total expenditure. -Only goods and services that are produced WITHIN A COUNTRY count as part of that countries GDP. -GDP measure value in a specific time period (usually quarterly or annually) -GDP = aggregate expenditure and = aggregate income. -Two approaches to measuring GDP...The expenditure approach/ the income approach.

Intermediate Good

(or service) An item produced by one firm, bought by another firm, snd used as a component of a final good or service. Whether or not a good is final or intermediate depends on what its used for - ex: restaurant buying ice cream, for sundaes.

Final good

(or service) Is bought by its final user during a specific time period.

Aggregate expenditure

(sum of red flows on diagram) = consumption expenditure + investment expenditure + govenment expenditure + net exports

(Limitations of Real GDP) Factors that influence standard of living and that are not part of GDP are....

-household production -underground economic activity -health and life expectancy -leisure time -security -environmental quality -political freedom and social justice

Market Value

Adding the price of ALL goods sold, the prices at which items are traded in markets.

Gross investment

Buying new capital and relaxing depreciated capital. The amount by which the value of capital increases is called net investment. Net investment = gross investment - depreciation

Government expenditure

Expenditure on goods and services. Financed with taxes.

A second hand good is....

Part of GDP in the year it was produced, not the current year.

underground economy

Part of the economy that is purposefully hidden form the view of the government to avoid taxes and regulations.

Real GDP per person

Real GDP divided by the population.

The growth potential of GDP - Potential GDP

The maximum level of real GDP that can be produced while avoiding shortages or labour, capital, land, and entrepreneurial ability that would bring rising inflation.

Double counting

The problem of adding value of intermediate goods/services produced to the value of final goods and services.

Net exports

The value of exports (X) - the value of imports (M)

Real GDP

The value of final goods and services produced in a given year when valued at the prices of a base year.

Aggregate income

Total income, Aggregate income = total amount paid for the services of the factors of production used to produce final goods and services - wages, interest, rent, and profit. (Y=C+I+G+(X-M)

Nominal GDP

Value of final goods and services produced in a given year when valued at the prices of that year.

The flow of expenditure and Income (Y C I G X M)

Y=C+I+G+(X-M) Y- Incomes C- Households I- Investments G- Governments X- Exports M- Imports ->Households make consumption expenditures (C) ->Firms make investments (I) ->Governments buy goods/services (G) ->Rest of the world buys net exports (X-M) -> aggregate income = aggregate expenditure

Households and Firms

households sell and firms buy the services of labour, capital, ad land in factor markets. For these factor services, firms pay income to households: wages, interest for use of capital, rent for use of land.