Chapter 13

Gross Domestic Product (GDP)

Total monetary value of all final goods and services produced domestically in one year.

Not included in GDP

• intermediate goods

• non-production transactions

• illegal activities

Intermediate goods

goods not in final form, such as wheat, wood, and salt

Non-production transactions

used goods and financial activities such as stocks and welfare payments

Illegal activities

eg. drug trade

how to measure GDP

output, income, expenditure

output method

output = actual value of goods + services provided (value - costs)

Benefits -> allows for statistical data based on sectors

Limitations -> doesnt include informal economic activities

Income method

adding up incomes of all groups where FoPs are sold

Benefits -> simple if formal economy

Limitations -> no informal activities added, corruption distorts statistics

Expenditure method

GDP = C + I + G + (X - M)

closed economy = simple consumption

open economy = variables such as gov spending, investments, exports/imports

Gross National Income (GNI)

Total income of a nation's people and businesses per year, including income earned from abroad.

GDP = C + I + G + (X - M)

C -> consumption (purchasing by individual)

I -> investments (spending by businesses)

G -> gov spending

(X - M) -> exports - imports

GNI = GDP + (incomes flowing in - incomes flowing out)

• incomes flowing in = earned by asset abroad

• incomes flowing out = paid to foreign assets operating domestically

• net property income from abroad

Real GDP

GDP adjusted for inflation

Nominal GDP

GDP that does not account for inflation.

Calculations: nominal GDP/GNI * price deflator = real GDP/GNI

• price deflator = nominal GDP/GNI / real GDP/GNI * 100

• price deflator = 100/(100+inflation rate)

GDP / GNI per capita

GDP/GNI per capita = GDP/GNI / population

Statistical Analysis

• shows whether country experienced economic growth

• helps develop policies

• helps develop models

• forecasts about the future

• comparing countries

issues with statistical analysis

inaccuracies, unrecorded data, external costs, quality of life

business cycle

• real GDP v time

• size of an economy

• recovery or recession (two consecutive periods of negative growth)

• long-term trends = real size of economy (average trend of economy)

Benefits of expansion

• real GDP increases (increased output)

• lower unemployment (increase in production)

  • higher wages -> more spending -> higher GDP

• higher imports, lower exports

• high inflationary pressure

Consequences of contraction

• unemployment (due to decrease in production)

  • low wages -> less spending -> lower GDP

• real GDP decreases (due to decreased output)

• deflation = prices are down

• lower imports, higher exports

Output gap

The difference between actual output and potential or trend output.

Negative output gap:

• low production -> deflation

• low employment

Positive output gap:

• high production -> high inflation

• high employment

OECD Better Life Index

• 35 member countries

• policies improving economic and social well-being

• 11 topics split into material living conditions and quality of life

Happiness index

• UN Sustainable Development Network

• 156 countries ranked by happiness

• data gathered through surveys

• variables include GDP per capita, social support, life expectancy, freedom, generosity, perceptions of corruption

happy planet index

• sustainable well-being

• HPI = (well-being life expectancy inequality of outcomes) / ecological footprint