Topic 3 - Gross Domestic Product

What is the link between expenditure and income?

Because firms pay out everything they receive as incomes to the factors of production (Y), total expenditure equals total income. Y = C + I + G + NX

What are the components of GDP?

Consumption expenditure (C): household consumption of G&S Investment (I): new capital goods and additions to inventories Government Expenditure (G): expenditure on G&S Net Exports of G&S (NX): value of exports (X) of G&S minus value of imports (M) on G&S (NX = X-M)

What are the 2 different approaches of calculating GDP?

Expenditure Approach: measures AU GDP by using C, I, G & NX data Income Approach: measures by summing income that firms pay households (wage income, company profits & imputed rents; mixed income)

What is nominal GDP?

GDP expressed in the prices of that same year. Basically both Q&P can change every year. Not easy to compare over time.

What is real GDP?

GDP expressed in the prices of the base year. Easy to compare over time. Essentially we let Q change every year but fix P to one base year.

What is Gross Domestic Product (GDP)

GDP is the market value of all the final goods and services produced within a country in a given time period.

What are the goods and services omitted from GDP?

Household Production Underground Production Leisure Time Environment Quality Health and Life Expectancy Political Freedom and Social Justice Meaning that using GDP to measure standard of living doesn't give an accurate measurement.

What is the business cycle?

It is a periodic, but irregular, up-and-down movement of total production and other measures of economic activity. The four stages of a business cycle are expansion, peak, recession and trough. It is the fluctuation in the pace of expansion of real GDP.

What is total expenditure?

It is the total amount received by producers of final goods and services. TE = C + I + G + NX

What is potential GDP?

It is the value of real GDP when all the economy's factors of production (labour, capital, land & entrepreneurial ability) are fully employed. Really this refers to efficient points on your PPF. Real GDP fluctuates around potential GDP.

What is household income?

Labour earns wages Capital earns interest Land earns rent Entrepreneurship earns profits (Remember firms owners are households too)

What goods and services are included?

Only final goods and services (Eg. you would include a cake sold but not the flour that was used to make the cake). Financial assets aren't included (Eg. bonds) Only goods produced within the country, doesn't matter who owns the production factory/corporation. Only goods produced within the set time period.

What are the 2 features of our changing standard of living?

The growth of potential GDP per person Fluctuations of real GDP per person around potential GDP

What the main purposes of estimates of real GDP?

To compare the standard of living over time To track the course of the business cycle To compare the standard of living among countries

How are living standards compared?

We calculate real GDP per person (Real GDP/population)

How is standard of living among countries compared?

We must convert real GDP into a common currency and common set of prices, called purchasing power parity (PPP).