Econ Flashcards on GDP

Gross Domestic Product (GDP)

• Measures total income and total expenditure on the economy's output of goods and services.
• Defined as the market value of all final goods and services produced within a country over a specified time period.

Components of GDP

• Four main components:
  • Consumption (C)
  • Investment (I)
  • Government Purchases (G)
  • Net Exports (NX)

Consumption

• Total spending by households on both goods and services.

Investment

• Total spending on goods that will contribute to future production.

Government Purchases

• Includes spending on goods and services by local or national governments, excluding transfer payments like social security.

Net Exports

• Represents purchases of domestically produced goods and services by foreign entities, calculated as NX = exports - imports.

Nominal vs Real GDP

• Nominal GDP values production of goods and services at current prices.
• Real GDP values production of goods and services at fixed prices, eliminating inflation effects.

GDP Calculation

• Calculated as: C + I + G + (X - M).
• Real GDP calculated using fixed price values (P1 x Q + P2 x Q).

GDP Deflator

• A measure of the overall level of prices in the economy.
• Calculated through the formula: GDP deflator = 100 x Nominal GDP / Real GDP.

Limitations of GDP

• GDP does not account for household production, underground economy activities, or the value of leisure.

Inflation

• Defined as an increase in the general price levels of goods and services within an economy.

Consumer Price Index (CPI)

• Measures the overall cost of goods and services bought by a typical consumer.
• Calculated using the formula: 100 x (cost of basket in current year)/(cost of basket in base year).

Inflation Rates

• Calculated for GDP using: 100 x (GDP deflator this year - GDP deflator last year) / GDP deflator last year.
• CPI inflation calculated as: 100 x (CPI this year - CPI last year) / CPI last year.

CPI vs GDP Deflator

• CPI measures changes in price levels for a typical consumer's basket, while GDP deflator reflects the price level changes of all final goods and services produced.