Economics Test- GDP Worksheet

Why do economists include only final goods in measuring GDP for a particular year? Why don't they include the value of stocks and bonds sold? Why don't they include the value of used furniture bought and sold?

GDP by definition measures only final, domestic goods and services produced in a given year. To avoid double counting and artificially inflating the size of the economy, we remove intermediate goods and any used goods. Also stocks and bonds are just purchases of already existing products; no new goods or services are produced when stocks and bonds are traded, thus those purchases are not part of GDP.

You buy a case of Hershey's chocolate bars

consumer expenditures

Toyota, a Japanese car manufacturer, builds a factory in Ohio

investment spending

Equation for (Real) Rate of Growth

(Real) rate of growth^year 2-year 1= ((real GDP Year 2- real GDP Year 1) / (real GDP year 1)) x 100

Why do economists calculate and discuss GDP per capita? Is growth of GDP per capita a good public policy goal if we want to ensure increases in citizen's life-satisfaction? Why or why not?

(real) GDP per capita is just (real) GDP divided by total population. It gives a measurement of new, final, domestic production per person, or production capacity per person. It is an indicator of basic living standards within a country but GDP per capita is not a measurement of living standards nor is it a measurement of well-being. Setting macroeconomic policy to increase GDP per capita is not ideal because an increase in GDP per capita (production growth outpacing population growth) does not mean that the increased production/wealth from production is shared across all peoples. Increases in GDP per capita, while nice statistics to report, do not mean that life is any better for citizens and does not guarantee and increases in well-being. It is not increased production or production capacity per person that makes us happier. Nor is it increases in income, it's what we get with increases in income: security. Thus, if governments really care about increasing life-satisfaction, they should work on providing citizens the ability to earn higher incomes, if desired; the ability to work harder, if desired, the ability to choose what life they want to lead.

Equation for GDP deflator

= (nominal GDP/real GDP) x 100

Investment

Any new construction, purchase of new equipment by business, and adages to inventory of unsold merchandise -produces domestically and in the year in question

Government purchases

Any purchase by any government organization on domestically produced goods/services in the year in question

Y=C+I+G+(X-IM)

Expenditure Approach GDP=consumer spending+ Investment spending+ Government spending+ (exports-imports)

GDP deflator

GDP deflator = (nominal GDP ÷ real GDP) x 100

Real GDP

GDP measured in a base year's $; adjusted for inflation

Nominal GDP

GDP measured in current year $, not adjusted for inflation

Net Exports

Goods/services produced domestically and sold overseas (Exports) minus goods purchased domestically that were produced overseas (IMports)

Equation for Inflation Rate

Inflation Rate^year 2-year 1= ((GDP deflator year 2- GDP deflator year 1) / (GDP deflator year 1)) x 100

Equation for Nominal GDP

Nominal GDP^year 1= SUM(Pi^year 1 x Qi^year 2)

Why would an economist use real GDP per capita to discuss economic growth within a given country over a 50 year time span? What information does real GDP per capita provide that real GDP does not provide?

Real GDP per capita is used to discuss growth over time within or among countries over long time spans. Over very long periods of time, a given country's population can change dramatically which isn't captured in Real GDP. Measuring Real GDP growth can inform us as to how total production has changed (and how national income has changed). Measuring real GDP per capita gives us a measurement of how production per person has changed over time, and an indication (but not a real measure) of how living standards may have changed over time within and among countries. Also growth in GDP per capita (production per person) is an indicator of productivity increases within an economy.

Equation for Real GDP

Real GDP^year 1= SUMi (Pi^base year x Qi^year 1)

GDP

The market value of all final goods and services produced within a country's borders in a given or specific period of time, usually a year.

Consumption

any purchases by business or household on consumption goods/services domestically produced in the year in question

The state of Ohio builds a new office building for the state legislature

government expenditures

You buy a 2009 Honda Civic from a guy on Craigslist

none - no new production occurred

Your aunt sends you $4000 for your birthday

none - no production occurred

Nike builds a new factory in Beijing

none - not domestic