16A: measuring GDP and economic growth

4 macroeconomic objectives 

1. Economic growth 

   1. Measured by GDP at the rate of between 3-4%

2. Full employment/ low unemployment 

   1. Unemployment rate of between 4-5%

3. Price stability/ low inflation 

   1. Inflation rate ( as measured by Consumer Price Index ) of between 2-3%

4. External stability 

   1. ( which is measured by stable exchange rate, low current account deficit and low foreign debt ) 

Measuring GDP and economic growth 

Economic growth

• is the growth in the productive capacity of the country 

• Shown by an outward expansion on the PPC curve 

• Every economy aims for sustainable economic growth 

• Measured in terms of GDP 

GDP (gross domestic product) 

• Is the total market value of all final goods and services produced within a country. 

• Definition is made up of four parts 

  • Market value- is the price at which each item is traded in the market

  • Final goods and services -those that are bought by their final user during a specified period of time and are not used as a component to produce other goods or services

    • Intermediate goods and services are those that are used as inputs in the production of goods and services 

    • Only the value of final goods are counted in the GDP. this is to avoid double counting. 

  • Only goods and services that are produced within a country count as part of a country’s GDP

• GDP not only measures the value of total production but also measures total incomes and total expenditure 

Computing economic growth rate 

• Economic growth rate= (real GDP in current year - real GDP in previous year / real GDP in previous year ) * 100 

Measuring GDP (3 methods) 

1. Production method 

2. Income approach 

   1. GDP is the sum of the amount received/income earned by the owners of the factors of production (the households), who help in producing goods and services (plus net indirect tax). 

   2. The income earned includes wages and salaries, rental income etc. therefore, GDP is the same thing as aggregate income (Y). 

3. Expenditure method 

   1. GDP is the sum of the total money spent on all goods and services by all sectors in the economy during a given time period. 

   2. GDP = aggregate expenditure (AE) 

GDP = Aggregate Expenditure = Aggregate Income = Y

Measuring GDP:- Expenditure Approach 

Exam question: Using the circular flow model, with the aid of a diagram show that aggregate expenditure equals C+I+G+EX-IM. 

Answer: 

Step 1- draw diagram = draw sectors 

Step 2- define AE + identify 4 sectors 

According to the expenditure approach in the diagram provided, GDP is the sum total of the money spent on all final goods and services by all sectors in the economy during a given period of time. As we can see in the diagram above, an open economy includes 4 sectors (households, firms, government, and the rest of the world) and the money spent to buy goods and services is called aggregate expenditure. 

Step 3- first component 

First, consumption expenditure “C” is the money spent on buying good and services by households, which includes the money spent on non-durable goods & durable goods. Shown by points 1~4 

Step 4- second component 

Secondly investment expenditure “I” is the money spent on buying goods and services by firms that includes purchases of new capital and expenditure on new residential houses by households. The formula for actual investment = planned + unplanned (change in inventory). Shown by point 5. 

Step 5- third component 

thirdy , government expenditure is the money spent buying goods and services by the government and incurred in all levels of government. This includes consumption and investment expenditure by the government. Point 6 shows this. 

Step 6- last component 

Lastly, net export “NX” is the value of exports of goods and services of goods and services minus the value of imports of goods and services. 

• EX>IM= surplus 

• IM>EX= deficit 

Conclusion 

It is therefore concluded that AE=C+I+G+NX\