Durable, Nondurable, Final, and Intermediate Goods

• Durable goods have a long lifespan and are more expensive upfront.
• Non-durable goods are consumed quickly and have a shorter lifespan.
• Final goods are ready for consumption or use by individuals or businesses.
• Final goods contribute to GDP by representing the total value of goods produced for consumption within a country's economy.
• Consumer goods are final goods meant for direct consumption.
• Capital goods are final goods used by businesses to produce other goods and services.
• Intermediate goods are used as inputs in the production process.
• Double counting is the mistake of counting the same value multiple times in GDP calculations.
• The value of intermediate goods are not included in a country's GDP as it would artificially inflate the GDP.

Circular Flow of Income

• The circular flow of income is a representation of the continuous movement of money and resources between households and businesses in an economy.
• It simplifies the complex interactions in the economy to understand how money, goods, and services move between households and businesses.
• The product market is where goods and services produced by businesses are sold to households.
• The factor market is where businesses purchase the resources they need to produce goods and services.
• The government collects taxes from households and businesses and provides public goods and services.
• As a buyer, the government purchases goods and services from businesses in the product market.
• Leakages are flows of money out of the circular flow, such as savings, taxes, and imports.
• Injections are flows of money into the circular flow, including investments, government spending, and exports.

GDP and GNP

• GDP is the total value of all final goods and services produced in an economy.
• GNP is the value of all goods and services produced by a country's residents, regardless of location.
• Real GDP is the total value of all final goods and services produced in an economy, adjusted for inflation.
• Nominal GDP is the total value of all final goods and services produced in an economy, measured in current prices.
• GDP Deflator is a price index that measures the average change in prices of all goods and services in an economy from a specified base year, calculated as (Nominal GDP / Real GDP) * 100.
• A good cannot be both an intermediate good and a final good simultaneously; it is either used in production (intermediate) or consumed/used directly (final).
• Distinguishing between intermediate goods and final goods ensures that a country's GDP is calculated correctly, providing a more realistic representation of its economic performance.

Examples of Goods

• A refrigerator purchased by a household is durable and final.
• Tires sold to an automobile manufacturer to be installed on new cars are durable and intermediate.
• A loaf of bread bought at a grocery store for home consumption is non-durable and final.
• A laptop purchased by a university for staff use is durable and final.
• Steel used by a construction company to build a skyscraper is durable and intermediate.
• A bottle of shampoo used at a hair salon for customer services is non-durable and intermediate.
• A new couch purchased by a furniture store for resale is neither and not yet in GDP; it is inventory, which is counted in GDP when sold.
• A smartphone purchased by a consumer for personal use is durable and final.
• Gasoline purchased by a taxi company for daily operations is non-durable and intermediate.
• A wedding cake bought by a couple for their wedding reception is non-durable and final.

Circular Flow of Income: Sectors, Contributions, and Roles

• The two main sectors in the simple circular flow model are households and businesses.
• Households provide resources (such as labour) and consume goods and services.
• Businesses produce goods and services and pay households for their resources.
• Households contribute to the circular flow by providing labour to businesses in exchange for wages, which they use to purchase goods and services.
• Businesses produce goods and services, pay households wages for labour, and invest in capital and production.
• This drives the economy by creating jobs and generating income.
• The two types of markets involved in the circular flow model are the product market and the factor market.
• Taxes reduce household income and business profits, slowing the flow of money, while subsidies and government spending inject money into the economy, increasing the flow.
• A closed economy does not engage in international trade, meaning all economic activity happens domestically.
• An open economy includes imports and exports, allowing money to flow between countries.
• Financial institutions facilitate saving, lending, and investment, helping businesses and households manage their funds and influencing the flow of money in the economy.
• When households save more and spend less, businesses earn less revenue, potentially leading to reduced production, layoffs, and slower economic growth.
• Exports bring money into an economy by selling goods and services to foreign countries, increasing the flow of income.
• Imports send money out of the economy, reducing the flow.
• An increase in government spending injects more money into the economy, leading to higher demand, more jobs, and a greater flow of income.

Nominal GDP vs Real GDP & GDP Deflator

• Nominal GDP is the total value of goods and services produced in a year at current prices.
• Real GDP is adjusted for inflation, reflecting the true volume of production.
• If nominal GDP in 2024 is $500 billion and real GDP is $450 billion, the GDP deflator is 111.11. GDP Deflator = (Nominal GDP / Real GDP) × 100 = ($500B / $450B) × 100 = 111.11
• Suppose real GDP increased from $2 trillion in 2023 to $2.2 trillion in 2024, then this indicates economic growth.
• A GDP deflator greater than 100 indicates that prices have increased compared to the base year, indicating inflation.
• In 2010, if nominal GDP was $14 trillion, and real GDP was $12 trillion, then GDP Deflator = ($14T / $12T) × 100 = 116.67.
• If nominal GDP grows by 6% in a year, but inflation is 4%, real GDP grew by 2%. Real GDP growth = Nominal GDP growth - Inflation = 6% - 4% = 2%.
• If the overall price level increases but the quantity of goods and services produced remains the same, nominal GDP will increase.
• If the GDP deflator increased from 110 in 2022 to 120 in 2023, inflation rose by approximately 9.1%. The GDP deflator increasing from 110 to 120 indicates inflation, meaning prices rose by approximately 9.1% [(120-110)/110 × 100].
• If a country has a nominal GDP of $1 trillion and the GDP deflator is 125, the real GDP is $800 billion. Real GDP = (Nominal GDP / GDP Deflator) × 100 = ($1T / 125) × 100 = $800 billion
• Real GDP is better for measuring economic growth because it accounts for inflation and reflects the actual change in production rather than just changes in prices.
• Real GDP accounts for changes in price levels over time by using constant base-year prices.
• Calculating real GDP helps to eliminate the effects of inflation or deflation, providing a more accurate measure of an economy's true growth.
• If the GDP deflator is greater than 100, real GDP will be lower than nominal GDP, indicating that prices have increased compared to the base year.
• A decrease in the GDP deflator indicates a decrease in overall price levels, and real GDP will be higher than nominal GDP.
• The GDP deflator may not fully account for changes in consumption patterns, technological advancements, or shifts in the composition of goods and services.
• Nominal GDP and real GDP would be the same if the GDP deflator is 100, indicating that there has been no change in price levels since the base year.