Midterm 2 Study Guide 02 24 2013 Chapter 7 GDP What is GDP Where things are produced Gross Domestic Product time period only counts final goods What is GNP Who produces things Gross National Product The market value of all final goods and services produced in a country during a specific The market value of all final goods and services produced by citizens of a country either produced domestically or in another country I e Disney World in Japan counts for US GNP and counts for Japan s GDP GDP Per Capita Per Person Annual income US in 8th in the world we have a lot of national GDP but individually our production isn t great GDP Population 100 GDP Capita GDP Capita Average income for a country How do we calculate GDP Two ways Market value of all final goods and services produced in the US in a given accounting 1 Expenditures Approach period sum of everything purchased Y C I G X M GDP Consumers Business Government Exports Imports GDP What people buy What businesses buy What government buys Exports Imports C Consumption Expenditures What people buy Counts everything the typical consumer buys except for New Home Sales those are included in I business Also you only count homes the year they are build you don t count the sale of used home unless you are counting the commission made by the realtor etc I Business Expenditures What businesses buy G Government Spending Mainly national defense and labor X M Net Exports Greater than or equal to 0 means we export more Less than or equal to 0 means we import more trade creates value 2 Income Cost Approach Measures income generated by production cost of what is produced See Figure 1 Aggregate GDP focuses on the sum total of all markets People thing when the net exports is less than 0 that s bad but it s really not remember Add up all of the income generated in the production of all goods and services or the Aggregate Demand Sum total of what people are spending C I G X M Aggregate Supply Cost approach income generated R W i Rent Wages Interest What does GDP include 1 Market value of final goods and services not intermediate goods I e Value Added VA Final Good Farmer s Cotton Textile Mill Designer s Dress Retail Macy s 5 start 12 20 50 5 cotton 17 cloth 37 dress 87 dress on shelf 87 is the number amount that counts towards GDP 2 Only goods and services produced during the accounting period Does not include second hand sales However it does count salesman s commission because that is a current production service Does not count financial transactions and transfer payments I e Stocks welfare social security etc Broker fees do count though Value Added Tax VAT middle class Causes The VAT is a tax that taxes the good every time value is added Since the VAT is assessed on things people buy not income it falls heavily on the Market values will rise and prices will rise Since it is on expenditures and not income consumption decreases note when something costs more we do less of it Many times VATs start out small and then will grow to much more These tax free goods become taxed not visibly but since their production is taxed they Non taxable goods I e medicine bandages etc producer ends up raising the price Problems with using GDP to measure our output 1 Doesn t count non market production 2 Doesn t count underground economy Illegal activities and payments Barter or cash trades 3 Doesn t reflect leisure time activities human cost I e if the average work weeks hours change from 40 hours week to 20 hours week GDP does not account for this 4 Doesn t account for product quality I e pocket calculators in 1950 and pocket calculators now 5 Doesn t subtract out for our economic negatives I e pollution 6 Doesn t not account for introduction of new goods therefore its hard to use GDP as a comparison with a lot of years in between I e typewrites 1900 vs computers 2010 7 Doesn t account for inflation Why do we need to adjust prices to reflect inflation To make sensible comparisons year to year I e Year 1 P x Q P1 Q1 P Q Year 2 Movie Tickets Bballs Pens Total GDP P x Q Movie Tickets Bballs Pens Total GDP 10 20 50 P2 12 22 75 P x Q Movie Tickets P1 10 Bballs Pens 20 50 Total Real GDP 1000 5000 10 000 20 000 10 000 5 000 25 000 Q2 900 400 10 000 Q2 900 400 10 000 P Q 10 800 8 800 7 500 27 100 P Q 9 000 8 000 5 000 22 000 Initially we assume year 2 is more productive just by looking at the Nominal GDP 27 100 but really year 2 is less production but we don t see that because inflation tricks us To adjust All you do is take the price from year 1 P1 and multiply it by the quantity from year 2 Q2 and you get the Real GDP 22 000 and you compare that to the real GDP form year 1 to see after we adjust for inflation year 2 is less productive than year 1 Nominal GDP Number of Real GDP Purchasing power The measurement of the year measured is the nominal GDP if you want to compare that year to another year you must take the inflation out and you get a real value GDP there are as many real values as your want there is only 1 nominal value per year How to correct for inflation Nominal output value the year the good service is produced Real output value when measured by other dollar s standard using other year s dollar p CPI Consumer Price Index Market basket of goods consumers would buy List of things consumers buy determine inflation month CPI 100 inflation GDP Inflator Compare the price of things on the list and the sum of the list month to month to C I G but a borader measure GDP is a poor measure of our well being Why do we use GDP It does one thing very well National Y Accounting It gives us the comparison of our productivity from year to year Terrible in regards to measuring but great in regards to comparing Tells us our productivity is changing and in which direction Its biased but its biased in the same direction every year this is why its bad at measuring but good at comparing Especially good at comparing if the years are close together Also helps us establish more goals for growth Chapter 16 17 What makes a nation wealthy 1 Natural Resources Sufficient natural resources is helpful but not necessary 2 Size of labor force Overabundance Is too big a problem 3 Democracy vs non democracy US was founded as a Republic but we are starting to move toward a democracy Republic is an economy government that rules by …
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