(page 490 in Economics)
Define GDP and distinguish between a final good and an intermediate good. Provide examples.
GDP is the market value of all the final goods and services produced within a country in a given time period. A final good or service is an item that is sold to the final user, that is, the final consumer, government, a firm making investment, or a foreign entity. An intermediate good or service is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. For instance, bread sold to a consumer is a final good, but wheat sold to a baker to make the bread is an intermediate good. Distinguishing between final goods and services and intermediate goods and services is important because only final goods and services are directly included in GDP; intermediate goods must be excluded to avoid double counting them. For example, counting the wheat that went into the bread as well as the bread would double count the wheat—once as wheat and once as part of the bread. 2.
Why does GDP equal aggregate income and also equal aggregate expenditure? GDP equals aggregate income because one way to value production is by the cost of the factors of production employed. GDP equals aggregate expenditure because another way to value production is by the price that buyers pay for it in the market.
What is the distinction between gross and net?
“Gross” means before subtracting depreciation or capital consumption. “Net” means after subtracting depreciation or capital consumption. The terms apply to investment, business profit, and aggregate production.
(page 493 in Economics)
What is the expenditure approach to measuring GDP?
The expenditure approach measures GDP by focusing on aggregate expenditures. Data are collected on the different components of aggregate expenditure and then summed. Specifically, the Bureau of Economic Analysis collects data on consumption expenditure, C, investment, I, government expenditure on goods and services, G, and net exports, NX. These expenditures are valued at the prices paid for the goods and services, called the market price. GDP is then calculated as C + I + G + NX.
What is the income approach to measuring GDP?
The income approach measures GDP by focusing on aggregate income. This approach sums all the incomes paid to households by firms for the factors of production they hire. The National Income and Product Accounts divide income into five categories: compensation of employees; net interest; rental income; corporate profits; and proprietors’ income. Adding these income components does not quite equal GDP, because it values the output at factor cost rather than the market price and omits depreciation. So, further adjustments must be made to calculate GDP: Indirect taxes and depreciation must be added and subsidies subtracted.
What adjustments must be made to total income to make it equal GDP? Total income is net domestic product at factor cost. To convert it to gross domestic product at market prices, we must add the depreciation of capital and add indirect taxes minus subsidies.
What is the distinction between nominal GDP and real GDP?
Nominal GDP is the value of final goods and services produced in a given year valued at the prices of that year. Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year. By comparing the value of production in the two years at the same prices, we reveal the change in production.
How is real GDP calculated?
The traditional method of calculating real GDP is to value each year’s GDP at the constant prices of a fixed base year.
(page 499 in Economics)
Distinguish between real GDP and potential GDP and describe how each grows over time.
Real GDP is the value of final goods and services produced in a given year when valued at the...