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Measuring Economic Activity

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25 views16 pages

Measuring Economic Activity

Uploaded by

Theresia
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Week02

MEASURING
ECONOMIC ACTIVITY
GROSS DOMESTIC
PRODUCT
 GDP is the market value of all final
goods and services produced within a
country in a given period of time.
GROSS DOMESTIC
PRODUCT
 “GDP is the Market Value . . .”
Output is valued at market prices.
 “. . . Of All Final . . .”
It records only the value of final goods, not
intermediate goods (the value is counted
only once).
 “. . . Goods and Services . . . “
It includes both tangible goods (food,
clothing, cars) and intangible services
(haircuts, housecleaning, doctor visits).
GROSS DOMESTIC
PRODUCT
 “. . . Produced . . .”
It includes goods and services currently
produced, not transactions involving goods
produced in the past.
 “ . . . Within a Country . . .”
It measures the value of production within
the geographic confines of a country.
GROSS DOMESTIC
PRODUCT
 “. . . In a Given Period of Time.”
It measures the value of production that
takes place within a specific interval of time,
usually a year or a quarter (three months)
GROSS DOMESTIC
PRODUCT
 GDP includes all items produced in the
economy and sold legally in markets.
 GDP excludes most items that are:
produced and consumed at home and
that never enter the marketplace,
produced and sold illicitly, such as illegal
drugs.
How to measure GDP?
 GDP can be measured as ….
1. a sum of spending (or expenditure) on final
products, or
2. a sum of income or earnings
Both approach yield exactly the same
measure of GDP, because
every transaction has a buyer and a seller.
every dollar of spending by some buyer is a
dollar of income for some seller
THE PROBLEM OF DOUBLE
COUNTING
 How to avoid double counting?
We have to include only final goods that are
produced and sold for consumption or
investment, and exclude the intermediate goods
that are used up in making the final goods.
We have to calculate value added at each stage
of production.
○ The value added can be defined as the difference
between a firm’s sales and its purchases of
materials and services from other firms.
DETAIL OF THE COMPONENTS
OF GDP
 GDP (Y) is the sum of the following:
Consumption (C)
 Investment (I)
 Government Purchases (G)
 Net Exports (NX)
Y = C + I + G + NX
REAL VERSUS NOMINAL GDP

 Nominal GDP values the production of


goods and services at current prices.
 Real GDP values the production of
goods and services at constant prices.
An accurate view of the economy requires
adjusting nominal to real GDP by using the
GDP deflator.
THE GDP DEFLATOR

 The GDP deflator is a measure of the


price level calculated as:

 It tells us the rise in nominal GDP that is


attributable to a rise in prices rather than
a rise in the quantities produced.
GDP VS GNP
 GDP is the total market value of all final
goods and services produced within a country
in a given period of time.
 GNP is the total market value of final goods
and services produced during a given period
by the factors owned by a nation.
 GNP = GDP + (IR – IP)
IR = factor income received from abroad
IP = factor income paid to abroad
IR – IP = net factor income received from abroad
FROM GDP TO NATIONAL INCOME
(NI) TO DISPOSABLE INCOME (DI)

 GDP = C + I + G + NX
Less Depreciation
Less Indirect Taxes
 Equal to National Income (NI)
Minus Direct Taxes
Minus Net Business Saving
Plus Transfer payment
 Equal to Disposable Income (DI)
GDP AND ECONOMIC WELL-
BEING
 Higher GDP per person indicates a
higher standard of living.
 However, GDP is not a perfect measure
of the happiness or quality of life.
GDP AND ECONOMIC
WELL-BEING
 Some things that contribute to well-
being are not included in GDP.
The value of leisure.
The value of a clean environment.
The value of almost all activity that takes
place outside of markets, such as the value
of the time parents spend with their children
and the value of volunteer work.
PRICE INDEXES AND INFLATION

 Price index (P) is a measure of the


average level of price.
 Inflation refers to a situation in which the
economy’s overall price level is rising.
 The inflation rate () is the percentage
change in the price level from the
previous period.

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