Econ chapter 24

green GDP

an alternative measure of GDP that subtracts the environmental costs of production from the positive outputs normally counted in GDP

government purchases

spending on goods and services by all levels of government

consumption

spending on goods and services by private individuals and households

investment

spending on productive inputs, such as factories, machinery, and inventories

GDP per capita =

GDP / population

real GDP

GDP calculation in which goods and services are valued at constant prices

Nominal GDP

GDP calculation in which goods and services are valued at current prices

GDP deflator

=( Nominal GDP /Real GDP ) X 100

Explain the difference between real and nominal GDP, and calculate the GDP deflator.

GDP is a function of both the quantity of goods and services produced (output) and their market value (prices); an increase in GDP can result from growth in either or both components. To isolate the role of growing output, we can control for price changes. Real GDP is calculated based on goods and services valued at constant prices. Nominal GDP is calculated based on goods and services valued at current prices. If we want to measure price changes, we can calculate the GDP deflator, a measure that summarizes the overall increase in prices in an economy using the ratio between real and nominal GDP.

inventory

the stock of goods that a company produces now but does not sell immediately

Macroeconomics

the study of the economy on a regional, national, or international scale

Gross National Product(GNP)

the sum of the market values of all final goods and services produced plus capital owned by the permanent residents of a country in a given period of time

Gross Domestic Product(GDP)

the sum of the market values of all final goods and services produced within a country in a given period of time

GDP growth rate

□(64&GDP growth rate =(〖"GDP" 〗_𝑡 −〖"GDP" 〗_(𝑡−1))/〖"GDP" 〗_(𝑡−1) ) X 100

The expenditure approach breaks expenditures down into four categories:

Consumption Investment Government purchases Net exports

Explain the equivalence of the expenditure and income approaches to valuing an economy.

Economists can think about the size of a national economy in three different ways: how much is produced (output), how much is spent (expenditure), and how much income is earned (income). All three of these methods add up to the same thing. Total output is the value of the things produced in an economy in dollar terms, which is the same as the price for which those outputs sell, which is the same as what people spent to buy those outputs. Therefore, the value of output is equal to expenditures. Every transaction has both a buyer and a seller, so expenditures by one person translate directly into income for someone else; therefore, income equals expenditure.

Discuss some limitations to GDP, including its measurement of home production, the underground economy, environmental degradation, and well-being.

GDP is a rough measure of the average standard of living in a country, but does not tell us about the distribution of wealth. Furthermore, three important segments of the economy are not included in GDP by design: home production (goods and services that are produced and consumed within a household); the underground economy (illegal transactions, or legal transactions that simply aren't reported to the government); and externalities (such as pollution) that are not fully accounted for in regular production or consumption measures. Higher GDP is often associated with other indicators of higher well-being, such as health, education, and life satisfaction, but does not guarantee those things.

Calculate and explain the meanings of GDP per capita and the real GDP annual growth rate.

GDP per capita is total GDP divided by the population of a country. It tells us the average income or productivity per person in the economy. To track changes in an economy over time, we can calculate the real GDP growth rate, measured as the percent change in real GDP from one time period to the next, typically annually or quarterly at an annual rate. When the economy shrinks, the growth rate is negative, and is one of the major indicators used to determine whether the economy is in a recession or depression.

Justify the importance of using the market value of final goods and services to calculate GDP, and explain why each component of GDP is important.

Most goods and services go through several production steps and may pass through multiple firms before ending up in the hands of the consumer. However, when calculating GDP, we should consider only the value of the final good or service, in order to avoid double-counting. The value added by each step of the production process will be included in the price of the final product. The most commonly used variable for measuring the value of a national economy is gross domestic product, or GDP. GDP is the sum of the market values of all final goods and services produced within a country in a given period of time. The goods and services that count toward GDP are defined in terms of the location of production, not the citizenship of the producer. GDP is usually calculated on an annual and quarterly (three-month) basis; only new goods and services being produced within that time period are counted. Quarterly GDP estimates are typically given as a seasonally adjusted annual rate, which projects what annual GDP will be based on the current quarter's output if the economy continues to follow expected seasonal patterns.

Explain the three approaches that are used to calculate GDP, and list the categories that are included in the expenditure approach.

The expenditure approach of calculating the size of an economy involves adding up all spending on goods and services produced in an economy, and subtracting spending on imports. We can break expenditures into four categories: Consumption (C) measures spending on goods and services to be consumed by private individuals and families. Investment (I) includes any goods that are bought in order to produce other goods and services in the future. Government purchases (G) are goods and services bought by all levels of government, for either consumption or investment. Finally, net exports (NX) is foreign spending on domestically produced goods and services minus domestic spending on foreign-produced goods and services. The sum of these categories and the equivalence of income (Y) and expenditure gives us the equation Y = C + I + G + NX. The income approach adds up the income earned by everyone in a country—including wages (earned by workers), interest (earned on capital investments), rental income (earned on land and property), and profits (earned by firms). The value-added approach accounts for the value that is added at each stage of production in the economy. This approach allows economists to investigate the contribution of each transaction in the economy to overall GDP. It also solves the double-counting problem because only part of the value of each transaction is registered, and it does not register the total price of intermediate goods and services. Many countries use all three approaches to calculate GDP so that policy-makers and researchers can get a full picture of economic activity.

GDP per capita

a country's GDP divided by its population

GDP deflator

a measure of the overall increase in prices in an economy, using the ratio between real and nominal GDP

depression

a particularly severe or extended recession

recession

a period of significant economic decline

net exports

exports minus imports; the value of goods and services produced domestically and consumed abroad minus the value of goods and services produced abroad and consumed domestically