Chapter 6: GDP and the Measurement of Progress

Flashcards covering key vocabulary related to GDP, its measurement, components, and limitations, based on Chapter 6 of the lecture notes.

Standard of living

Refers to the level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area, including factors such as income, quality and availability of employment, class disparity, poverty rate, quality and affordability of housing, hours of work required to purchase necessities, gross domestic product, inflation rate, and number of vacation days per year.

Real Gross Domestic Product (GDP) Per Capita

A typical and good measure of an individual's standard of living, which gives a good measure of an individual's standard of living.

Gross Domestic Product (GDP)

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

GDP Per Capita formula

GDP (in billions USD) / Population (in billions).

Finished goods and services

Goods and services that are sold to final users and then consumed or held in personal inventories.

Intermediate goods

Goods sold to firms and then bundled or processed with other goods or services for sale at a later stage; they are not counted in GDP to avoid double counting.

Growth rate of GDP

Tells how rapidly a country’s production (or income) is rising or falling over time, calculated as [(GDPt - GDPt-1) / GDPt-1] * 100%.

Nominal Variables (Nominal GDP)

Variables that have not been adjusted for changes in prices; Nominal GDP is measured using current prices.

Real Variables (Real GDP)

Variables that have been adjusted for changes in prices by using the same set of prices in all time periods; Real GDP growth nets out inflation.

National Spending (Expenditure) Approach to GDP

A common way of computing GDP as the sum of Consumption (C), Investment (I), Government Expenditures (G), and Net Exports (NX); represented as Y = C + I + G + NX.

Consumption (C)

Private spending on final goods and services, mostly by households, including spending on cars, food, furniture, TVs, iPhones, medical care, and education expenses.

Investment (I)

Private spending on tools, plants, and equipment (capital) used to produce future output, primarily by businesses, with the main exception of new home production.

Government Purchases (G)

Spending by all levels of government on final goods and services, such as tanks, airplanes, office equipment, roads, and government employee wages, but excludes government transfers.

Net Exports (NX)

The value of exports minus the value of imports, which can be negative if a nation imports more than it exports.

Factor Income Approach to GDP

A common way of computing GDP as the sum of the income components: Wages + Rent + Interest + Profit.

Underground Economy (GDP Limitation)

Economic activities, including illegal drugs, counterfeit goods, and legal goods/services sold 'under the table,' that are not counted in GDP because no explicit payment is recorded.

Nonpriced Production (GDP Limitation)

Occurs when goods and services are produced but no explicit payment is made, such as the value of goods and services produced at home (e.g., household chores) or volunteer work, which is omitted from GDP.

Leisure (GDP Limitation)

Time spent not working, which people value but is not directly counted in GDP, causing biases in comparisons over time and across countries.

'Bads' (GDP Limitation)

Negative outcomes such as pollution, depletion of resources, loss of species, or crime, which GDP adds up the value of finished goods and services but does not subtract.

Distribution of Income (GDP Limitation)

The way income is spread among a population; GDP per capita does not measure or reflect how equally income is distributed.

Real GDP growth per Capita approximate formula

Real GDP growth - population growth.

Recessions

A significant, widespread decline in economic activity spread across the economy, lasting for more than a few months, normally visible as a decline in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Business Fluctuations (Business Cycles)

Short-run movements in real GDP around its long-term trend, defining economic booms and contractions.