Measuring Economic Activity (GDP) Econ Vocab

what does gross domestic product (GDP) measure?

• measures total income of everyone in the economy

• measures total expenditure on the economy’s output of goods and services (g&s)

Why does income equal expenditure in GDP?

because every dollar a buyer spends is a dollar of income for the seller

Households

• own the factors of production, sell/rent them to firms for income

• buy and consume goods and services

firms

• buy/hire factors of production, use them to produce goods and services

• sell goods and services

What does the circular-flow diagram omit?

• the government collects taxes, buys g&s

• the financial system matches savers’ supply of funds with borrowers’ demand for loans

• the foreign sector trades g&s, financial assets, and currencies with the country’s residents

gross domestic product (GDP) is…

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

What are the four components of GDP?

• Consumption (C)

• Investment (I)

• Government Purchases (G)

• Net Exports (NX)

What is the formula for GDP?

Y = C + I + G + NX

What is consumption (C)?

is total spending by households on goods (durable and nondurable) and services

What is investment (I)?

is total spending on goods that will be used in the future to produce more goods

includes spending on:

• Capital equipment (machines, tools)

• structures (factories, office buildings, houses)

• intellectual property (R&D, artistic originals)

• inventories (goods produced but not yet sold)

what are government purchases (G)?

is all spending on the g&s purchases by government at the federal, state, and local levels

what are transfer payments?

Social Security or unemployment insurance benefits

What are net exports (NX)?

NX = exports (EX) - imports (IM)

• Exports represent foreign spending on the economy’s g&s

• Imports are the portions of C, I, and G that are spend on g&s produced abroad

nominal GDP

• values output using current prices

• not corrected for inflation

real GDP

• values output using the prices of a base year

• is corrected for inflation

What is a GDP deflator?

a measure of overall levels of prices

What is the formula for GDP deflator?

GDP deflator = 100 x nominal GDP/real GDP

How do you measure inflation rate?

Inflation rate (year 2) = 100 x (GDP def. (year 2) - GDP Def. (year 1))/GDP Def. (year 1)