ECON CH21: GDP

macroeconomics

total income in the whole county, total output produced by all businesses and total spending across all people, businesses and the country’s government

circular flow diagram

a simple model of the economy that illustrates how households and businesses are linked

• green arrows show flow of real resources

• purple arrows show the flow of $$$

all equal

Total output, spending and income are ______.

gross domestic product

the market value of all final goods and services produced within a country in a given year

the market value

value each product at its market price

final goods and services

count only these specific goods and services, omitting intermediate goods

produced

omit resale of already-produced goods

within a country

include all goods produced within the US, but exclude goods produced overseas

in a year

add up the flow of output over this time period

total spending

measure GDP by adding up every dollar of spending

total output

measure GDP by adding up every dollar’s worth of output produce

total income

measure GDP by adding up every dollar of income earned

made, sold

GDP counts goods in the year they’re ____, regardless of the year in which they’re ____.

Y = C + I + G + NX

GDP equation

exports - imports

net exports

consumption

household spending on final goods and services

ex: clothes, shoes, food, gas

investment

spending on new capital assets that increase the economy’s productive capacity

• any long-lasting goods used in a business (research and development spending, office furniture, equipment, etc.)

a newly built house

Buying _______ counts as an investment.

government purchases

spending on schools, highways, military, vaccine research, etc.

transfer payments

Government purchases exclude _____ _____ → ex: social security or unemplouyment insurance checks

transfer payments

simply pass income from one person to another

net exports

spending on exports minus spending on imports

exports

goods and services produced domestically and purchased by foreign buyers

imports

goods or services produced overseas and purchased by domestic buyers

value added

the amount by which the value of an item is increased at each stage of production

total sales - cost of intermediate inputs

value added equation

total income

the sum of total wages and total profits

declining

Labor’s share of income is _____.

prices are not values

our values are not the same as market prices

nonmarket activities are excluded

GDP only measures goods and services that are sold in markets → misses a lot of productive activity

shadow economy

In GDP, the _____ ____ is missing.

shadow economy

the economic activity purposefully conducted out of view of the government, and thus, excluded from GDP

environmental degradation is not counted

GDP treats natural resources as if they have no value until they’re transformed into something else, ignores the costs of environmental degradation

leisure does not count

GDP counts the benefit of work but omits the cost of work

GDP ignores distribution

GDP measures the size of the economic pie, and GDP per person measures the size of the average slice, not actual slices of individual people

the resources that a society has available to pursue what matters in life

What DOES GDP measure?

nominal GDP

GDP measured in today’s prices

real GDP

GDP measured in constant prices → excludes the effects of price changes

growth in production

Real GDP measurements allow us to isolate _______ that has taken place.

price x quantity

calculating GDP

%change in RGDP + %change in prices

%change in NGDP

%change in NGDP - %change in prices

%change in RGDP

size of the economy, their own history

Compare big numbers to the _______ or _______.

long-run growth rates

Use the Rule of 70 to evaluate _______.

rule of 70

divide 70 by the annual growth rate to approximately get the number of years until the original amount doubles

70/annual growth rate

years it takes something to double =