Economics Notes: Gross Domestic Product

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Gross Domestic Product (GDP) – is the total market value of all FINAL gods and services produced within a country in a year. It is used for measuring the economic growth of a country – how much a country’s economy has grown from one year to the next

GDP can be calculated in two ways:
1. Expenditure Approach: add p the total spent on final goods and services in one year 2. Income Approach: add up all the income earned in producing final goods in one year (GDP should be same in each case, since an expenditure for one person is an income for another)

Expenditure Approach Formula for GPD: C + G + I + (X – M)
C = consumption; what households spend on goods and services (such as durable goods, semi-durable goods, non-durable goods, services)

G = government spending; all government purchases by all levels of government (such as employee wages, office supplies, hospitals, schools)

I = Investments; purchase of new capital goods for the use in the. (Production process, construction of new buildings, changes in business inventories)

X = Exports, M = Imports
(X – M) = net exports

Two types of GDP
Nominal GDP; Is the production of goods and services valued at current prices (not adjusted for inflation) Real GDP; Unlike nominal GDP, real GDP can account for changes in the price level, and prove a more accurate figure

A rising GDP indicates a strong and expanding economy.
A falling GDP is associated with higher unemployment and overall economic weakness.

Things the GDP does not included
1. Intermediate goods and services, which are inputs in the production of goods (i.e. Steel) 2. Second hand goods (not included, since they were already previously counted) 3. Buying & selling of stocks

4. Transfer payments (social security benefits, unemployment compensation, scholarships) 5. Profits from Canadian owned companies overseas & income earned by Canadian citizens ....working aboard 6. Non-market goods and services (baby-sitting)

7. Illegal goods and services (drugs)

Drawbacks to GDP
1. Population size –
2. Non-market production –
3. Underground economy –
4. Types of goods produced –
5. Leisure –
6. Environmental degradation –
7. Distribution of income –
8. Improved quality –

Nominal GDP (Money GDP): Is the production of goods and services valued at current prices (not adjusted for inflation) (I.E. – if real output was the same in 2007 and 2008, but the prices were higher in 2008, the GDP would appear to have grown although real output did not increase at all)

Real GDP (constant dollar’s GDP): GDP that accounts for changes in the price level, and provides a more accurate figure than Nominal GDP

GDP deflator: Is a price index for all goods and services produced, it illustrates how much of the change in the GDP from a base year is reliant on changes on the price level

Real GDP (Rearrange to find GDP deflator, Nominal GDP):

GDP deflator:

Nominal GDP:

Real GDP growth rate:

Aggregate Demand (AD)
The TOTAL demand for final goods and services in the economy at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels.

Factors that will shift the AD curve:
1. Changes in consumption
Consumer income can be divided into 4 possible uses
i) Consumption (60%)
ii) Pay government taxes
iii) Saved for future use
iv) Spent on imports
Increased consumption shifts AD curve right. Decreased consumption shifts AD curve left.

2. Changes in investment
Increased investments (expected higher profits) shifts AD curve right Decreased investments (expected lower profits of a company) shifts AD curve left Increased interest rates tend to reduce investment spending shifts AD curve left Decreased interest rates tend to increase investment spending shifts AD curve right

3. Changes in Government Spending
Increased government spending shifts AD curve right...
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