Please enable JavaScript.
Coggle requires JavaScript to display documents.
circular flow and GDP + limitations of GDP - Coggle Diagram
circular flow and GDP + limitations of GDP
nominal GDP (not adjusted for inflation)
real GDP (not adjusted for inflation)
base price (fixed)
only the quantity output changes
How wel did our output increase?
Y (GDP) = C (consumption) + I (investment by firms) + G (government spending) + exports - imports
EXPENDITURE APROACH
income approach: measure GDP by the aggregate income
the summation of all income earned through
WAGES ON LABOR, INTREST ON CAPITAL, RENT ON LAND, PROFITS ON EUNTREPENEURIAL ACTIVITIES
expense approach: measure GDP with aggregate expenses from the formula, MOST USED
value added approach: measure GDP by how much value is added to a product in a particular country.
baker gets ingredients for the farmer for $4 and then constructs a delicious chocolate cake which he sells for $20 so his contribtution to GDP is =sell price - buy price = $16
transfer payments like social welfare tax reduction or so are not included in government spending because nothing is being bought and no service is being given, transfer payment is indirect.
the investment category does not include financial assets, it only includes spending by firms or individuals on real physical assets like a new home, inventory, new software, new buildings etc, i repeat real phsyical assets.
limitations of GDP
nominal GDP: wrong image of countries productivity
if output remains constant for a year, but prices rise 3 percent, it looks like the productivity of the country has risen 3 percent but this is not always the case.
underestimate the countries output
non marketed / illegal goods are not included in GDP
used to measure well being and happines with the real GDP per capita (average income per person) but this can give a wrong image because of wealth inequality
overestimate the countries output
capital depreciation.