Notes on Gdp

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Chapter 7 Measuring a nation's income

The economy's income and expenditure
GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services. GDP can perform the trick of measuring both total expenditure because these two things are really nearly the same. For an economy as a whole, generally, income must equal expenditure This is true because: An economy's income is the same as its expenditure because every transaction has two parties a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller

Issues: Households do not spend all of their income; they pay some of it to the government in taxes, and they save some for use in the future. In addition, households do not buy all goods and services produced in the economy; some goods and services are bought by governments and some are bought by firms that plan to use them in the future to produce their own output. General rule of thumb still stands.

The measurement of GDP
Definition of GDP as a measure of total expenditure: the market value of all final goods and services produced legally within a country in a given period of time

GDP is the market value…
Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods. If the price of an apple is twice the price of an orange, then an apple contributes twice as much to GDP as does an orange

...of all...
It includes all items produced in the economy and sold legally in the markets. GDP also includes the market value of the housing services provided by the economy's stock of housing such as rent for rental properties and possible rental return for those that have their own home (rent to oneself) GDP excludes most items produced and sold illegally and does not include goods and services that do not enter the market at all - such as the use of backyard vegetables for the night's roast.

...final…
When Nuplex Ltd produces fibreglass and NZ Yachts Ltd buys the fibreglass to make luxury yachts, the fibreglass is called an intermediate good and the yacht is called a final good. GDP includes only the value of final goods. This is done because the value of intermediate goods is already included in the prices of the final goods An important exception to this principle arises when an intermediate good is produced and, rather than being used, is added to a firm's stock of goods to be used or sold at a later date. In this case, the intermediate good is taken to be 'final' for the moment, and its value as inventory investment is included as part of GDP. Thus, additions to inventory add to GDP, and when the goods in inventory are later used or sold, the reductions in inventory subtract from GDP

...goods and services…

...produced…
GDP includes goods and services currently produced. It does not include transactions involving items produced in the past. When FNP produces and sells a new refrigerator, the value of the refrigerator is included in GDP. When one person sells a used refrigerator to another person, the value of the used fridge is not included in GDP

...within a country…
GDP measures the value of production within the GEOGRAPHICAL confines of a country. When a Malaysian citizen works temporarily in NZ, her production is part of NZ's GDP. When a NZ citizen owns a factory in Malaysia, the production at that specific factory is not part of NZ's GDP

...in a given period of time.
GDP measures the value of production that takes place within a specific interval of time. Usually that interval is a year or a quarter. GDP measures the economy's flow of income and expenditure during that interval. In comparing quarterly GDP, statistical authorities present the data after they have been modified by a statistical procedure called seasonal adjustment. The unadjusted data show clearly that the economy produces more goods and...
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