Chapter 7: Measuring GDP

Gross Domestic Product

The sum of the market values of all final goods and services produced within a country in a given period of time

Four important pieces of the definition of GDP:

• The market value

• Final goods and services

• Produced within a country

• The given period of time

Gross National Product (GNP)

The sum of the market values of all final goods and services produced by a country’s businesses within a given period of time

How does GDP differ from GNP?

• GNP includes the worldwide value of all final goods and services produced y a country’s businesses

• GNP excludes production by foreign businesses within the country

National production Equation

National production= National expenditure = National income

Expenditure approach

Highlights the importance of consumer spending. versus government purchases

Income approach

Emphasizes information about the relative importance of different factors of production

Value-Added Approach

Useful for tracking how goods are sold and resold

Expenditure Approach Equation

Consumption (C) + Investment (I) + Government purchases (G) + Net exports (NX) = Total expenditure

Consumption (C)

Measures spending on goods and services by private individuals and households

True or False:

1. Rent and college tuition are included in consumption

2. A used camera bought on eBay is included in consumption

1. True

2. False

Investment (I)

Includes spending on productive inputs, such as factories, machinery, and inventories.

Inventory

The stock of goods that a company produces now but does not sell immediately

Government purchases (G)

Represents goods and services bought by all levels of government

Net Exports (NX)

Exports minus imports

If exports are higher than imports, NX will be____ (Positive/Negative)

Positive

Expenditure Equation

Expenditure = C + I + G + NX = Production

National Income equation

National Income= Wages + Interest + Rental income + Profits

Real GDP

GDP calculation in which goods and services are valued at constant prices

Nominal GDP

GDP calculation in which goods and services are valued at current prices

GDP Deflator

Measure of the overall change in prices in an economy, using the ratio between real and nominal

GDP Deflator equation

= (Nominal GDP/Real GDP) x 100

GDP Per Capita

A Country’s GDP divided by its population

Recession

A Period of significant economic decline

Depression

A severe or extended recession

Goods and services that are consumed by an end-user are called

• capital goods.

• intermediate goods.

• investment goods.

• final goods.

Final Goods.

Identify four categories of total expenditure.

• Government spending

• Net exports

• Net imports

• Consumption

• Investment

• Production

• Government spending

• Net exports

• Consumption

• Investment

GDP is defined by which of the following factors?

• Country boundaries

• Labor contribution

• Land entitlements

• Market value

• Capital requirements

• Final goods

• Time period

Country boundaries

Market value

Final goods

Time period

In the expenditure approach, intermediate goods are part of GDP

• as a form of foreign-sector spending on goods and services.

• The value of intermediate goods is never included in GDP.

• as a form of government spending on goods and services.

• since their direct value represents investment spending by businesses.

• only in the sense that their value is contained in the market price of the final good.

only in the sense that their value is contained in the market price of the final good.

Why do economists count only the market value of final goods and services in GDP?

• To exclude the value of intermediate goods

• To include the value of second-hand goods

• To include GNP

• To avoid double-counting

To avoid double-counting

Expenditures by one person translate into____ for another person.

income

For any given base year, which of the following is true?

• GDP deflator = 100

• Nominal GDP > Real GDP

• Nominal GDP < Real GDP

• Nominal GDP = Real GDP.

• GDP deflator = 0

• GDP deflator = 100

• Nominal GDP = Real GDP.