Gross domestic product
Defined
Monetary measure ($)
Allows us to compare our GDP with other country’s GDP
Multiple counting
We want to avoid this
We only count the final good because if we were to total up all the prices of intermediate goods it would equal the final goods
Ex. If a car is $30,000 and the intermediate goods are the same price and we use multiple counting the price would be $60,000
Ex. lettuce, carrots, and vinegar are intermediate goods of a salad while the whole salad is a final good
We want to avoid this to make sure we only count the xyz to all be on the same page
Intermediate goods- used to make final goods
Final goods- the actual item that the consumers purchase
Approaches to calculating GDP
The income approach
Expenditures approach
We will use this
Calculates GDP by adding up how much people spent (by adding up every individual’s expenditures)
Key variables
Consumption ( C )
Gross Private Domestic Investment ( Ig )
We shorten it to Gross Investment or in Prato land just investmentIn the circular flow diagram, gross investment equals the firms
Purchases of capital, construction, and changes in inventories (“leftover stuff from last year”)
Ex. If I go to Macy’s and buy 500 bottles of cologne (consumption) then sell 300 of the bottles, I’d still have 200 bottles left, but that is 200 less bottles than I’d have to spend the next year (gross investment/changes in inventory)
Government ( G )
Net Exports ( Xn )
When we add all of these up we get the GDP through the expenditures approach
Both ways will add up to the same number
Not counted in GDP
Public transfer payments
Private transfer payments
Any job or work that you do not report as a part of your income/on your taxes
Ex. babysitting, mowing the lawn, parents giving allowance, etc.
We don’t know how much of it actually exists
Second hand sales
We only count the first time it was sold, if we count when it was sold again we would be double counting, the second hand sale does not contribute to current production of the good
Ex. selling your 1995 Ford Mustang to a friend
Even if the price of the second hand sale is higher than the original price it was bought at we still do not count it in GDP
Stock market transactions
Buying and selling shares of ownership in a company, nothing is being produced, you are just transferring ownershipEx. i have a company and have 1000 shares of ownership, i keep 600 and sell 400, i still have majority power over my company when it comes to voting on something
Nominal GDP vs. Real GDP
Nominal GDP is NOT adjusted for inflation
Measured in current prices/values
Real GDP has been adjusted for inflation
Real values are the real values
Inflation
A general rising of prices (in an economy)
Calculated by the consumer price index (CPI) using a market basket
Consumer price index (CPI)
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