Ch. 6 TB Notes – GDP and the Measurement Progress

Gross Domestic Product (GDP)

The market value of all finished goods and services produced within a country in a year.

GDP per capita

GDP divided by a country’s population, serving as a rough measure of a country’s standard of living.

Nominal GDP

GDP calculated using current prices at the time of sale.

Real GDP

GDP adjusted for changes in price or inflation, by measuring the value of goods and services at one price over time allowing for comparisons across different time periods.

Intermediate Goods

Goods and services used as inputs in the production of final goods and services.

Business Cycle

The fluctuations in economic activity that an economy experiences over a period of time; includes expansions and recessions.

Recession

A significant decline in economic activity spread across the economy lasting more than a few months, typically visible in real GDP and employment.

Government Purchases (G)

Total spending by all levels of government on finished goods and services within a year. Does not equal spending

Net Exports (NX)

The value of a country's exports minus its imports; a component of GDP.

GDP Deflator

A price index that measures inflation by comparing nominal GDP to real GDP.

Factor Income Approach

A method of calculating GDP that totals the incomes earned by factors of production, including wages, rents, interest, and profits.

Underground Economy

Economic activity that occurs outside of formal markets and is not reported to the government.

Nonpriced Production

Production of goods and services that does not involve a monetary transaction, hence not measured in GDP.

Environmental Costs

Negative impacts on the environment that are not accounted for in GDP measures.

Distribution of Income

The way in which a nation’s total GDP is divided among its population, which can vary significantly.

Consumption (C)

Private spending by households on finished goods and services. Typically, the largest component of GDP, it includes expenditures on durable and non-durable goods as well as services.

Investment (I)

Spending on capital goods that will be used for future production.

Gross National Product (GNP)

Measures the value of goods and services produced by residents of a country, regardless of where the production occurs.

Real GDP per Capita

A measure of the average economic output per person, adjusted for inflation.

Employee Compensation

The total income earned by employees, including wages and benefits.

Change in Real GDP

The growth rate of real GDP, indicating the increase in an economy’s production.

Cyclical Changes in GDP

Fluctuations in GDP that accompany changes in the business cycle.

Intermediate Goods

Goods used in the production of final goods and services, not counted in GDP to avoid double counting.

Capital goods

Goods used to produce other goods or services, such as machinery and buildings, that are included in GDP.

Domestic

products produced within a country's borders.

Imported goods

products brought into a country from abroad for sale.

Increase in prices

over a period of time, commonly referred to as inflation, which affects purchasing power and economic stability. (GDP can rise if goods and services increase)

Increase in production

refers to a rise in the quantity of goods and services produced in an economy, contributing positively to GDP and indicating economic growth. (more goods and services made or higher-valued goods and services)

Real GDP per Capita

is the inflation-adjusted measure of a country's economic output per person, providing a more accurate reflection of living standards and economic well-being.

Real GDP per Capita equation

is calculated by dividing the real GDP of a country by its population, allowing for a comparison of economic performance across different nations.

economic growth

is the increase in the production of goods and services in an economy over time, often measured by the rise in real GDP.

inflation

is the rate at which the general level of prices for goods and services rises, eroding purchasing power.

Business cycle

refers to the fluctuations in economic activity that an economy experiences over time, typically involving periods of expansion and contraction.

unemployment rate

is the percentage of the labor force that is jobless and actively seeking employment.

economic policy

is the actions taken by government to influence its economy, including fiscal and monetary measures.

Real GDP per Capita key indicators (Human Development Index HDI)

life expectancy (with better healthcare systems, improved nutrition, and enhanced living conditions, all contributing to longer life spans), happiness (with higher income often linked to greater life satisfaction), and education levels (as economic prosperity typically allows for better educational opportunities) when people have more material goods, they can afford more other things to improve quality of life

Limitations of Real GDP per Capita

include the exclusion of non-market transactions, environmental degradation, and not accounting for income distribution (income inequality), which can provide a misleading picture of overall economic well-being.

Splitting GDP

National spending approach and factor income approach

National spending approach

is a method of calculating GDP that totals the expenditures made in an economy, including consumption, investment, government spending, and net exports.

Factor income approach

is a method of calculating GDP that sums all incomes earned by factors of production in an economy, including employee compensation (wages), rents, interest, and profits.

Gross Domestic Income (GDI)

is the total income earned by residents and businesses in a country, including wages, profits, rents, and taxes, minus subsidies.

employee compensation

includes wages, salaries, and benefits paid to workers.

Rent

is the income earned by property owners from leasing or renting out their real estate or other assets.

Interest

is the income earned by lenders for providing loans, typically expressed as a percentage of the principal amount.

Profit

is the financial gain obtained when total revenue exceeds total costs, often seen as a measure of business success.

Policymakers

are individuals or groups responsible for creating rules, regulations, and laws that govern economic and social policies, often aiming to influence economic performance and stability.

National spending approach abbreviated

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

GDP deflator equation

is calculated as (Nominal GDP / Real GDP) x 100, measuring the level of prices for all new, domestically produced, final goods and services in an economy.

National Wealth

is the total value of assets owned by individuals, businesses, and the government within a nation, reflecting the aggregate economic resources available.

GDP equation

Price multiple quantity of all final goods and services produced in a country during a specific period.

Real GDP per Capita equation

is calculated as Real GDP divided by the total population, providing a per-person measure of economic output.

Real GDP and real GDP per Capita is a good measure of

economic performance and living standards between 2 countries or 2 different periods in the same country

Government purchase

refers to expenditures made by the government directly on goods and services that contribute to the economy's production.

Government spending

Transferring money to others for public services and welfare programs.

Growth rate

is the percentage increase in real GDP over a specific period, indicating the pace at which an economy is expanding.

1st Growth rate equation

(Ending value minus starting value) divided by the starting value and multiple by 100

GDP measures

Output, income, and spending of a country. It does not reflect the well-being of each person in a economy

2nd Growth Rate equation

(Final value divided by the original value) subtract be 1

market value

How much each good or service is worth in terms of currency, reflecting the price it can fetch in the market.

Double counting

occurs when the same economic activity is counted more than once in GDP calculations, leading to an inflated measure of economic output.

Gross National Product (GNP)

The total value of all final goods and services produced by a country's residents in a given time period, including income earned abroad.

Real variable

A variable that has been adjusted for inflation, reflecting the true purchasing power of money over time.

Production

The total value of output produced in an economy, is calculated as the product of the price of goods and services and the quantity produced.

Business fluctuations

The ups and downs in economic activity, typically measured by changes in real GDP over time.

Short run changes in GDP

Fluctuations in economic activity that occur over a brief period, influenced by factors like demand and supply shocks.

Y represents

Nominal GDP (the market value of all finished goods and services)

GDP does not allocate for

underground economy (illegal or underground transactions are omitted), non-priced production (stay-at-home Mom), environmental costs (Pollution), the health of the nation (The more goods and services there are the more wealthy a nation is), and distribution of income which can lead to an underestimation of actual economic activity.

Non-priced production

refers to goods and services that are produced but not sold in the market, such as household labor or volunteer work, which are not captured in GDP calculations.