CH 6 Measuring GDP & economic growth

GDP

Market value of all final goods and services produced with in a country during a given period of time, typically one year

Intermediate goods

goods used to make other final goods of which they are a component of

EX: milk at Starbucks

Why don’t we include intermediate goods in GDP calculations?

double counting

Physical capital

factories, machines, and other tools that are used to produce final goods, but of which they are NOT a component of 

net investment

the amount by which the physical capital stock grows during a particular year 

gross investment

the amount of new physical capital that is produced during a particular year 

Depreciation

the amount of existing physical capital that wears out, becomes obsolete, or becomes otherwise unusable during a particular year

Net investment formula

Gross investment minus depreciation

Newly produced physical capital

The value of _________ in GDP taht is included as the value of gross investment, not net investment 

GNP

Includes final goods and services that are produced by the countries firms

EX; BMW owned by germany but produced in the us. GNP: germany GDP: us

Two approaches to calculating GDP

the expenditure approach and the income approach.

Expenditure approach

A method of calculating GDP that totals consumer spending, private investment spending, government purchases, and net exports (exports minus imports).

Consumer spending

• All spending on newly produced g/s by individuals and households

• does not include used goods

• does not include value of newly produced homes

private investing spending

• spending by firms on newly produced physical capitol 

• includes newly produced homes

government purchases

• spending by the government on newly produced goods and services 

• does not include transfer payments (snap)

Net exports

• the value of a country's exports minus its imports

• indicates the trade balance of an economy

Income approach

a method for calculating GDP that sums up all incomes earned by factors of production in an economy such as: Wages paid to labor, rental income payed to land, Interest income paid to capital 

• Factor prices not MV (what was earned not what was spent)

• Only physical capital increase would be captured as Net investment not gross investment

Income approach equation 

proprieters’ income (small and med size)

+Corporate profits

=net domestic income at factor price 

+depreciation

+taxes net 

= GDP 

Nominal GDP

Market Value  of all final goods and services at current year prices

Real GDP

Market value of all final goods and services at constant or base year price

Growth rate

New-old/ old x 100

Rule of 70 

How long it takes a variable to double if it grew at a particular sustained rate

why is GDP not a perfect measure of production

GDP underestimates the true value of production. Additionally the government doesn’t monitor household production and underground economic activity

Why GDP id not a perfect measure of the standard of living

does not measure leisure time, environmental quality, and crime