CHAPTER 8: What you should know
Gross Domestic Product (GDP)
-A nation's gross domestic product is the total market value of its final output of goods and services produced within a given year using factors of production located within the nation's borders. -Because GDP measures the value of a flow of production during a year in terms of market prices, it is not a measure of a nation's wealth
The Limitations of Using GDP as a Measure of National Welfare
-Gross domestic product is a useful measure for tracking year-to-year changes in the value of a nation's overall economic activity in terms of market prices. -But it excludes non market transactions that may add to or detract from general welfare. -It also fails to account for factors such as environmental quality and the amount and quality of leisure time.
Distinguishing between Nominal GDP and Real GDP
-Nominal GDp is the value of newly produced output during the current year measured at current market prices. -Real GDP adjusts the value of current output into constant dollars by correcting for changes in the overall level of prices from year to year. -To calculate real GDP, we divide nominal GDP by the price index (the GDP deflator) and multiply by 100.
The Circular Flow of Income and Output
-The circular flow of income and output captures two principles: 1) In every transaction, the seller receives the same amount that the buyer spends 2) Goods and services flow in one direction, and money payments flow in the other direction. -Households ultimately purchase the nation's total output of final goods and services. They make these purchases using income-wage, rents, interest, and profits- earned from selling labor, land, capital, and entrepreneurial services, respectively. -Hence, income=the value of output
The Expenditure Approach to Tabulating GDP
-To calculate GDP using the expenditure approach, we sum consumption spending, investment expenditures, govt spending, and net export expenditures. -Thus, we add up the total amount spent on newly produced goods and services to obtain the dollar value of the output produced and purchased during the year.
The Income Approach to Computing GDP
To tabulate GDP using the income approach, we add total wages and salaries, rental income, interest income, profits, and non income expense items-indirect business taxes and depreciation-to obtain gross domestic income, which is equivalent to gross domestic product. -Thus, the total value of al income earnings (equivalent to total factor costs) equals GDP.