What is GDP?
- Used to measure the performance of the overall economy
- Total market value of all final goods and services produced within a specific territory ina a given period of time
- Does not include intermediate good- raw materials
What are the three ways of measuring GDP?
- Production measure
- Expenditure measure
- Income measure
What is the production measure of GDP?
- The number of goods produced in the economy
- Quantity of goods sold X price
- Revenue genreated by each producer = Value of intermediate goods
- Only new production of goods and services count
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What is the expenditure measure?
- The total purchases in an economy
What is the income measure of GDP?
- Measures the sum of all income earned in the economy
- (E.g. Employee compensation, wages, salaries, employee benefits, net interest, corporate profts …)
- Deperciation- Waring down of capital
- Apart of the income approach, as some of the income is paid towards the depreciation of capital. The deterioration of the capital stock due to wear and tear
- GDP- Depreciation = net domestic product
What is depreciation?
- Apart of the income approach, as some of the income is paid towards the depreciation of capital. The deterioration of the capital stock due to wear and tear
- GDP- Depreciation = net domestic product
- Depreciation is the consumption of capital and shows the cost of production, therefore removing it from GDP shows the net result of economic activity
What is the impact of social secuirty payments to GDP?
Do not affect them, as this is just a transfer of income that already exisits and is not in exchange for goods and services
What share of GDP goes to labour?
2/3
What proportion of GDP goes to capital?
1/3
Income that is associated with machinery
What is the relationship between income and expnediture?
Income = expenditure
- Every transaction has a buyer and a seller
What things change GDP?
- Price
- Quantity
What is real GDP?
Keeps prices constant (Isolate effect on quantities)
What is nominal GDP?
- Use prices and quantities of the specific year
- = Price level X real GDP
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What is the equation for the percentage change in nominal GDP?
Percentage change in price level + percentage change in real GDP
Implict GDP price deflator
Shows what’s happening to the overall level of prices in the economy
Deflate nominal GDP to yield real GDP
- Only domestic goods
- Allows for basket to change
Consumer price index
Shows price increases when the quantities are held constant
Basket is expressed as current year prices over previous year prices
What are issues with measuring Real GDP and price level?
- Price of goods change overtime (Subsitution effect cannot be seen in CPI)
- Quality of goods change overtime (E.g. technological advancements)
- New goods and services are introduced, some old become obsolete
What is a stock?
Quantitiy measured at a given point of time
What is a flow?
Impact of inventories
- Firms profits being reduced in order to pay workers wages, is just a distribution
- Increase in inventories is investmetn by firms, therefore increased expenditure by the firms owners. Production increases just as much as production for final sale, but the sale of inventory combines positive spending (the purchaser) and negative spending (inventory disinvestment)
How is the value added calculated?
Value of firms output - value of intermediate goods that the firm purchased
What is an imputed value?
Estimated value of goods and services
- E.g. Homeowners rent, even though they don’t have to pay rent
Percentage change in (P x Y)
= Percentage change in (Y) + Percentage change in (P)
