Chapter 7 : Measuring GDP
Suppose, this year, you spend $15,000 on a car that was originally produced and sold during the last year. The sales person earns a commission of 3% on the sale. How much does the sale contribute to the GDP this year?
$450 to the GDP this year.
Consumption examples
Food, Clothing, Durable goods (computers, cars), Services (tutoring, plumbing), College Tuition
Expenditure Approach Definition
Highlights the importance of consumer spending versus government purchases
When is GDP and GNP equal?
In the base year
Expenditure by one person translate into __________ for another person.
Income
Wages, Interest income, and profit are all examples of types of ________
Income
When we exclude taxes and the foreign sector, every penny spent on a good or service becomes _______ for one of the factors of production
Income
Which of the following increase U.S. GDP, ceteris paribus: - Decrease in price level - Decrease in output - Increase in price level - Increase in output
Increase in price level Increase in output
In order to avoid double counting, we ignore the price of _________ goods and services?
Intermediate
New home purchases and unsold, new inventory are counted in the ______________ category of GDP
Investment
How do you calculate nominal GDP?
Quantity of each good produced in a given year X its prices in that year
U.S. GDP is usually calculated......
Quarterly
How do most people calculate GDP....
Quarterly; four times a year.
If you evaluate GDP using output from 2013 and prices from 2009, the result is called.....
Real GDP
The GDP measure that isolates changes in output is called ___________ GDP
Real GDP
What isolates changes in the economy's output?
Real GDP
Why are accumulated inventories categorized as they are in the expenditure approach?
They add to the future revenue of the firm.
In a closed economy, the income approach and the expenditure approach of evaluating the economy.....
They're equal
Why do economists only count the market value of final goods and services in GDP?
To avoid double counting
Gross domestic product measure the total market value of all ________ goods and services.
final
Capital goods are considered a ____________ expenditure.
investment
Depression defintion
is a severe or extended recession
Job creation and improved living standard are often the result of
rapid economic growth
What does consumption measure?
spending on goods and services by private individuals and households.
Expenditure defintion
the action of spending funds
GNP measures what?
the market values in the world, no matter where, the production occurs
What is the GDP deflator?
the measure of the overall change in prices in an economy, using the ratio between real and nominal GDP
Microeconoomics
the study of how individuals and firms manage resources.
Gross National Product (GNP)
the sum of the market values of all final goods and service produced and capital owned by the permanent residents of a country in a given period of time.
The difference between the sale value of a good, and the value of the good's inputs represents
the value added
A severe or extended recession is called a ___________
Depression
GDP deflator formula
(Nominal GDP/Real GDP) x 100
Examples of consumption expenditures
- A student buys a new tablet - a household buys groceries for a week - a individual purchases a new mountain bike
How do you calculate the real GDP?
- Choose a base year - Multiply the quantity of a goods produced in that year by its price in the base year
When is a recession marked?
- Falling GDP - Rising unemployment - increased number of bankruptcies
GDP per capita tells us the average income of a country. Why Is this not an adequate measure of a country's well being
- GDP per capita does not account for the prices of goods and services - GDP per capita does not indicate how income is distributed
GDP is the result of growth in both components......
- an increase in output and an increase in prices.
The expenditure approach to calculating GDP eliminates the issue of double-counting by ..........
Adding the market value of all final goods and services
GNP/GDP Similarities:
-Includes worldwide income earned by a country's enterprises and permanent and excludes production by foreign national working domestically.
GDP is commonly divide into ____ important parts, which include......
4 ; market value, final goods, borders, and time period
The expenditure approach to calculating GDP can be given by
= C+I+G+NX
Define GDP per capita
A country's GDP divided by its population
National Income Accounting
A measure used to add up economic activity to arrive at an overall value for the economy, without double cutting items that are resold more than once.
Black Market
A place where trade in Illegal Goods and Services take place
Why does GDP paint a misleading picture, in regard to average income of individuals?
Because of the populations of countries
Real GDP is calculated based on goods and services at _______
Constant Prices
Types of Expenditures
Consumption, Investment, Government Purchases, Net Exports
Nominal GDP is calculated based on goods and services valued at _________
Current prices (current at the time they are produced)
Income Approach Definition
Emphasizes information about the relative importance of different factors of production
What 2 methods do economists employ in order to calculate the market value of all final goods and services?
Expenditure Approach and Income Approach
When e compare the size and value of an economy.
Expenditure equals income
Investment examples
Factories, Machinery, Inventories, Structures, Warehouses, Buildings
Government Purchases
Goods and services bought by all levels of government
Underground Economy
Goods and services sold below the radar, outside of official records
Home Production
Goods and services that are both produced and consumed within one household
The most commonly used measure of an economy's value is .....
Gross Domestic Product
GDP:
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
The sum of the market value of all final goods and services produced and capital owned by permanents residents of a country during a specific period of time is called _________
Gross National Product
The strength of using the market value of goods and services when measuring GDP is that......
It puts all goods and services into a common metric
Researchers have expanded on GDP per capita as a measure of well-being and happiness by employing what metric?
Life Satisfaction Index
What is a solution to double counting?
National Income Accounting
Pollution in the production process is considered by some economists to be
Negative output
What encompasses changes in both output and prices?
Nominal GDP
Identify categories of goods and service that are NOT counted in GDP
Non-Market Externalities Home Production Underground Economy
In the expenditure approach, intermediate gods are part of GDP......
ONLY in the sense that their value is contained in the market price of final good
What error in assessment can occur if we look at GDP per capita without accounting for difference in the cost of living
Poorer countries appear less well-off than they really are
Using GDP as a measure of the average individual income across countries can be misleading because of....
Population differences
Suppose it would cost you $100 to have cleaning service clean your apartment. Rather than pay for the service, you and your roommates decide clean it yourselves. How would the GDP of your economy be affected by this decision.
The GDP would remain unaffected
The goods and services included in GDP are determined by.......
The location of the producer.
Four important pieces of GDP:
The market value, of final goods and services, produced within a country, in a given period of time
Inventory
The stock of goods that a company produces now but keeps to sell at a future time.
Macroeconomics
The study of the economy on a broad scale, focusing on issues such as economic growth, unemployment, and inflation
Gross Domestic Product
The sum of the market values of all final goods and services produced within a country in a given period of time
Value Added Approach Definition
Useful for tracking how goods are sold and resold
The __________ approach to measuring the size of a national economy avoids the problems of double counting and clarifies the resale of existing goods.
Value added
Income Expenditure Equation
Wages + Interest + Rental Income + Profits
Gray Market
Where legal economic transactions happen but are not reported to the government ex. hired to mow your neighbor's lawn, Babysitting
Do expenditure, income, and value added approaches have the same GDP number?
Yes
What is GDP?
a function of both the quantity of goods and services produced (output) and the market value(prices)
Recession definiton
a period of significant decline in economic acitvity
Macroeconomics Comprises what?
aggregated consumptions, productions, and prices, on a national level.