Economics 2, chapter 1 - Measuring a nations wealth: the national accounts

What are macroeconomic aggregates? Name 2, and explain also what they measure.

Statistical constructs that are built following a given set of conventions and as such, measures of economic activity goes values depend on the rules governing their computation. Ex. GDP and GDP deflator

What are the three ways to compute GDP?

1. Output approach: Adding up the value of the goods and services that have been produced in the economy

2. Expenditure approach: Adding up the expenditures pertaining the goods and services that have been produced in the economy

3. Income approach: Adding up the incomes that were created by the production of goods and services in the economy

What is an outputs added value?

It corresponds to the revenue generated by the sale of the output minus the value of intermediate goods/services used in the production process

What is double counting when it comes to measuring GDP?

You wrongfully count every step in ex making bread for the economy. You should count only the final product,

What is an intermediate good?

A good witch is used as an input in the production process of another tradable good or service

What is the final good?

A good that has “reached its final destination”

What are the three cases of final goods?

What two activities does gdp miss? But they are still estimated

1. Illegal activities

2. Aim of escaping direct and inderect taxes (moonlighting)

What two activities does GDP explicitly outside the scope?

• volunteering

• Homemaking/housekeeping

What is a nominal variable?

A variable expressed in current monetary units (using he prices as observed at the moment tha variable is measured

Give examples of nominal variables

A) total price of groceries purchased

B) The amount on one’s checking account

C) Amount of employees pay check

The evolution of a nominal variable over time (ex. Firms revenue) is the result of simultaneous evolution of? 2

• prices

• Quantities

In the case of an economy’s GDP, its evolution over time is the result of? 2

• the variation from one period to another of the output of final goods and services

• -11 - prices of the final goodss and services

What does real GDP measure?

Measure of output value whose evolution from one period to another is not effected my changes in prices

What is real GDP?

Value of final goods and services produced in an economy over a given period of time, measured in monetary units of a reference year (rather than in current monetary units)

How do you measure GDP at constant prices?

Base year chosen and you evaluate the whole GDP using that years prices

When is nominal gdp and real gdp equal?

At the reference year

What’s the problem with using a base year to count gdp?

The further the counted year is from the reference year the more distorted it is

How do you use chained prices to count gdp?

Step 1. You use the prices of the previous year to estimate the evolution of output volume from year t-1 to year t

Step 2. Use the progressions in volumes so as to reconstruct the whole time series

What is the gdp deflator?

The GDP deflator is a measure of price inflation, calculated by dividing nominal GDP by real GDP and multiplying by 100, reflecting the level of prices relative to a base year.

What does the evolution of the gdp deflator show?

Measures the share of the increase in the nominal GDP that can be attributed to price evolution (reference year a)

What is gdp per capita?

GDP per capita is the total Gross Domestic Product of a country divided by its population, providing an average economic output per person.

What is gross national product per capita?

Gross National Product (GNP) per capita is the total GNP of a country divided by its population, indicating the average economic output per person, considering the value of all goods and services produced by the residents of a country, regardless of where they are located.

How are indicators of gdp per capita used? 2

1. Follow the evolution of individuals wealth across time

2. To compare the average wealth of citizens in different countries (international comparisons)

What two Difficulties arise when one wants to proceed to international comparisons of individuals wealth?

1. Fluctuations between the exchange rate between the currencies of countries

2. Geographic differences in the purchasing power conferred my similar income amounts

What is purchasing power parity index (PPP)?

Conversion rate applicable between two currencies, based on a comparison of the domestic purchasing powers of the two currencies.

What is the Big Mac index?

The Big Mac index is a light-hearted measure of purchasing power parity (PPP) between currencies, based on the price of a Big Mac in different countries. It provides insight into whether a currency is undervalued or overvalued compared to the US dollar.

What are the problems with gdp per capita? 2

1. Does not tell anything about inequality

2. It’s incomplete anyways because an individuals living conditions are dependent on many other factors (such as: population health, life expectancy, access to education, culture, environmental quality, individual freedoms osv.)

How can you complete the info from GDI/capita

1. Human development index (combination of life expectancy, education level and purchasing power)

2. Human poverty index

3. Ecological footprint indicator

Say 3 good things about GDI/capita

1. Easily available

2. Synthetic

3. It correlates with other things (child mortality rate, life expectancy at birth, average education level, extreme poverty, öoteracy rate)