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Chapter 22: Measuring GDP and Economic Growth, GDP = AE = AI - Coggle…
Chapter 22: Measuring GDP and Economic Growth
Gross Domestic Product:
the market value of the final goods and services produced in a country over a period
Final good (or service):
an item bought by its final user during a specified time period (e.g a car)
Intermediate good (or service):
an item produced by one firm, bought by another firm and used as a component of a final good (e.g the tyres on a car)
GDP can be measured in 2 ways:
see pg 458 for circular flow of expenditure and income
By total expenditure earned producing goods and services:
Aggregate expenditure
AE = consumption expenditure + investment + governement expenditure + net exports
AE = C + I + G + X - M
By the total income earned producing goods and services:
Aggregate income
AI equals the total amount paid for the services of the factors of production used to produce final goods and services
Measuring GDP
Expenditure approach
•Measured using
aggregate expenditure
Income approach
•Measured using
aggregate income
includes
compensation of employees
(payment of salaries and wages) &
net operating surplus
(net interest, rental income, dividends and proprietors income)
GDP measured using income and expenditure approach won't always be the same.
•The gap between the expenditure approach and the income approach is called the
statistical discrepancy
•Calculation: (GDP Income total - GDP expenditure total ÷ GDP Income total x 100)
Real and nominal GDP
Real GDP:
GDP when valued at the prices of a given year (e.g 2005) and in the same currency units (e.g Purchasing Power Parity prices)
•useful when comparing changes in GDP over time & for making comparisons of standards of living over time and across countries
Nominal GDP:
aka normal GDP, GDP when valued at the prices of that year
Use and Limitations of Real GDP
•RGDP per person (RGDP ÷ population) tells us the value of goods and services that the average person can enjoy
fluctuates constantly over a long period (known as
business cycle
)
•Potential GDP is the
max level of RGDP
that can be produced
while avoiding shortages of factors of production
grows at a
steady pace
becuase the quantities & productivities of factors of production grow at a steady pace
•The business cycle is a periodic but irregular up and down movement of total production and other measures of economic activity
Every cycle has
2 phases
:
Expansion
(period where RGDP ↑)
Recession
(period where RGDP ↓ for at least 2 consecutive quarters)
and
2 turning points
:
Peak (point where an
expansion ends
and a
recession begins
)
Trough (point where
recession ends
and
expansion begins
)
Limitations of RGDP
•Real GDP is not a perfect measure of standards of living as it excludes some factors that influence standard of living such as: household production, leisure times, health and life expectancy, environmental quality etc
•These factors have more of an impact on developing countries compared to developed countries ∴ the gap between their living standards is exaggerated
•As real GDP grows, underground production can move to regular production and home production to market production
GDP = AE = AI