GDP Growth
Why are the income approach and the expenditure approach equal to each other?
- Both the expenditure approach and the income approach yield identical GDP calculations - The income approach: measures the total incomes earned by households in a nation in a year. - The expenditure approach: measures the total amount spent on the goods produced by a country in a year.
What is GDP? What does it measure?
- GDP is the market value of all final goods and services produced in a nation during a period of time, usually a year - GDP measures value using dollars, rather than a list of the number of goods and services - Gross Domestic Product (GDP) measures the total value of final goods and services produced within a given country's borders. It is the most popular method of measuring an economy's output and is therefore considered a measure of the size of an economy.
Know the difference between Real and Nominal GDP and why Real GDP is an important measure. How to calc real GDP.
- Real GDP: The value of all final goods produced during a given time period based on the prices existing in a selected base year - Nominal GDP: The value of all final goods based on the prices existing during the time period of production - Real GDP is an important measure because: Real GDP is important for two reasons. First, it tells you how much the economy is producing. Real GDP is also used to compute economic growth. The percentage change in real GDP is the GDP growth rate. - How to calculate Real GDP: Real GDP = nominal GDP/ GDP chain price index X 100
What are the shortcomings of GDP calculations?
- The distribution of GDP is not captured in GDP measures, The value of leisure in not included in GDP, The level quality of, and access to health care is not measured in GDP, GDP is not adjusted for pollution or other negative effects of production, GDP is not adjusted for changes in crime and other social problems - Non-market transactions Distribution, kind, and quality of products Neglect of leisure time Underground economy Economic bads
Why does GDP only measure final goods and services?
- if we included the value of the intermediate good and the final good, we would be double counting. - Finished goods and services produced for the ultimate user, the consumer of the good or service - Only final goods and services are counted, to avoid multiple counting, since their prices covers the cost of all intermediate products and services that were used to produce the final output. Another way to calculate GDP is to measure the value added to each product or service at each stage of its production.
What is the Expenditure approach?
The national income accounting method that measures GDP by adding all the spending for final goods and services
