Part 11
GDP
Definition of GDP:
Measures the market value of all final goods and services produced within a nation's borders in a specific time period.
Focuses on domestic economic activity and job generation.
What Does GDP Include?
Inclusions in GDP:
Counts only new domestic production.
Excludes:
Second-hand transactions
Non-productive financial transactions
Final Goods:
GDP includes only final goods, excluding intermediate products.
Concept of Value Added
GDP measures the value added at each production stage.
Flow versus Stock
Flow: Rate of change during a time period (e.g., weekly spending).
Stock: Quantity measured at a particular point in time (e.g., bank balance).
The circular flow model utilizes flow measurements.
Four-Sector Circular Flow Model
Households spend income on domestic goods:
Portions of income are:
Saved
Taxed
Spent on imports (leakages in the flow).
Approaches to Measuring GDP
Methods to measure GDP:
Expenditure Approach: Total spending on final goods.
GDP = C + I + G + (X – M)
Income Approach: Total incomes of all production factors.
GDP = Wages + Rent + Interest + Profits.
Output Approach (production based): Sum of all value added.
Household Consumption Expenditures (C)
Significant GDP component includes:
Services (education, healthcare).
Durable goods (cars, appliances).
Non-durable goods (food, clothing).
Gross Private Domestic Investment (I)
Represents spending that maintains/increases capital stock
Components include:
Fixed investment in newly produced capital goods.
Changes in business inventories.(unsold finished goods and raw materials)
Government Expenditures (G)
Includes:
Value of goods/services purchased by government.
Investment-type goods (building, highway, infrastructure).
Excludes government transfer payments from 1 level of govt to another.
Net Exports (X – M)
Exports (X): Spending by foreigners on local goods.
Imports (M): Spending by locals on foreign goods.
Formula for GDP
GDP Calculation: GDP = C + I + G + (X – M)
Other National Accounts
Net Domestic Product (NDP): GDP - depreciation of capital.
Gross National Income (GNI/GNP): GDP - Net income payable to foreigners. Income accrued to a country’s residents from the production of all final goods/services no matter where they are produced.
Gross Disposable Income (GDI): GNI - net transfer to foreigners.
Shortcomings of GDP as Economic Welfare Measure
GDP's limitations:
Non-market transactions.
Product distribution and quality issues.
Ignoring leisure time value.
Underground economy considerations.
Nominal GDP and Real GDP
Nominal GDP: (Current dollar GDP) value of all final goods and services produced during a time period based on current prices.
Real GDP: Adjusts nominal gdp for inflation to reflect real output (constant-dollar GDP).
Chain Volume Measure of GDP
Measures final goods/services at prices from a selected reference year.
Used by Australian Bureau of Statistics.
Changing Nominal GDP to Real GDP
Adjustment required to differentiate actual growth and not price changes.
Relationship between National Saving and Investment Relationship
Savings = Investment in simple terms (S = I)
National Saving = Total income - consumption.
National Investment:** Total spending on capital goods by private sector and govt
If national investment > national saving, balance is financed by net foreign investment. National investment - national saving = net foreign investment.
Decision Heuristics
Definition: Mental shortcuts for decision-making.
Anchoring Heuristic: tendency to use the first or most recognisable piece of information to make decision or judgement when faced with uncertainty or lack of information.
Availability Heuristic: Overestimation/underestimation of frequency of events based on familiarity/unfamiliarity.
Herding Heuristic: making decisions influenced by group opinions.