Chapter 6

Gross Domestic Product

Market value of all final goods and services produced within a country in a given year.

Four components of GDP measured by demand

C + I + G + (X-M)

C - Consumption

I - Investment

G - Goverment spending

(X-M) - Net Exports Exports minus Imports

Double counting

Count output more than once as it travels through production stages. Results in inflated and inaccurate measure of the national economy’s size and performance

Final Goods

Product sold to the end user

Intermediate good

Good used to produce another good

Things that are not counted in GDP

• sales of used goods

• Transfer payments

• Non-market activities

• Production in underground economy

difference between a trade surplus and trade deficit

• Trade surplus: exports are greater than imports (X>M)

  • Trade Deficit: imports are greater than exports(M>X)

Nominal GDP

Value of an economys output measured in the prices that exist at that time. It can be misleading because it includes effects of inflation

Real GDP

Value of output after it has been adjusted for inflation.

GDP Deflator

Price index that measures the avergae prices of all goods and services included in the economy. Formula is Real GDP = Nominal GDP / (GDP Deflator / 100)

GDP imperfect measure of well-being

• does not measure income inequality

• Variety of good available to consumers

• Environmental cleanliness

GDP per captia

GDP/Population

Caluclating growth of GDP Per captia over time

Future Value = Present Value X (1 + growth rate)ⁿ 

What is a recession?

Recession is a significant decline in real GDP. Key part of the business cycle, which is the economy’s movement from peak to trough and back to peak

Depression

Long and deep recession