Gross Domestic Product and Business Cycles

Comprehensive flashcards covering the definition, calculation methods (Output, Income, Expenditure), and limitations of GDP, as well as the phases and causes of business cycles.

What is the official definition of Gross Domestic Product (GDP)?

The market value of ALL FINAL goods & services produced within a given time period [a year].

Why does GDP stress the value of 'final goods' versus 'intermediate goods'?

Intermediate goods are inputs for further processing and not for final consumption; including both would result in DOUBLE COUNTING or overestimating the GDP.

What are three types of transactions excluded from GDP because they involve no current output?

i) Old or second-hand output (e.g., resale HDB flats), ii) Paper transactions (e.g., bonds & shares), and iii) Purely financial transactions (e.g., monetary gifts).

Which current outputs are excluded from GDP because they are difficult to track or value?

i) Illegal activities (underground economy like drug trafficking) and ii) Non-marketed activities (housework by housewives or do-it-yourself activities).

What is the primary difference between GDP and Gross National Product (GNP)?

GDP is a geographical measure of output within a country’s borders, while GNP is a residential concept measuring output produced ONLY by a country's citizens (residents), whether at home or abroad.

What is the formula to link GNP and GDP using Net Factor Receipts?

$$GNP = GDP + \text{Net Factor Receipts}$$

How is 'Net Factor Receipts' defined?

$$\text{Net Factor Receipts} = \text{Earnings by residents from abroad} - \text{Earnings by non-residents in the country}$$

What are the formulas for Money GDP and Real GDP (Method 1)?

$Money GDP = P_{cy} \times Q_{cy}$ and $Real GDP = P_{by} \times Q_{cy}$, where $cy$ is current year and $by$ is base year.

What is the GDP price deflator?

A measure of the level of prices of all new, domestically produced, final goods and services in an economy, used to deflate money GDP into real GDP.

What is the formula for Real GDP using the GDP price deflator?

$$Real GDP = \frac{\text{Money GDP}}{\text{GDP price deflator} / 100}$$

What is the formula for the Economic Growth Rate?

$$\text{ECONOMIC GROWTH RATE} [\%] = \frac{Real GDP_{cy} - Real GDP_{py}}{Real GDP_{py}} \times 100\%$$

What are the three approaches to estimating GDP?

a) Output Approach (Product Approach), b) Income Approach, and c) Expenditure Approach.

What is the identity relating National Output, National Income, and National Expenditure?

$$\text{National Output} = \text{National Income} = \text{National Expenditure}$$

What is the formula for the Expenditure Approach to GDP?

$$GDP = C + I + G + [X - M]$$

In the Expenditure Approach formula, what do 'C', 'I', and 'G' represent?

C stands for Consumption (household spending), I stands for Investment (firms' spending on property, machinery, and inventories), and G stands for Government expenditure.

List five limitations of GDP as a measure of a country's standard of living.

1) Excludes illegal/non-marketed activities, 2) Does not indicate leisure time, 3) Does not reflect social costs (pollution), 4) Does not show improvements in quality, and 5) Does not show income distribution.

What is the formula for Per Capita GDP and why is it used?

$Per Capita GDP = \frac{GDP}{Population}$; it is a better measure of well-being as it accounts for population size and shows the average dollar output per person.

What is a business cycle?

The periodic but irregular up and down movement in economic activity, characterized by phases of expansion and contraction in GDP.

What are the four phases of the business cycle in correct sequence?

Recession, Trough, Recovery, and Peak.

When is an economy officially in a 'technical recession'?

After it has experienced 2 quarters of NEGATIVE economic growth.

What is 'Stagflation' and what causes it in the AD-AS model?

A situation of high unemployment and high prices occurring simultaneously, caused by a decrease (leftward shift) in Aggregate Supply (AS).

How did Singapore attempt to increase Aggregate Supply (AS) during the 2008 US subprime crisis?

Through the Jobs credit scheme, where the government gave employers $12\%$ of the first $\$2,300$ of employee wages to reduce production costs.