Unit 2 - Gross Domestic Product Pt.3

Nominal GDP:
- Value of output produced in current prices
- Adjusted to inflation
- Can increase from year to year if output price increase

+Formula: Price (current year) x Quantity (current year)

Real GDP:
- Value of output produced in constant base year price
- Can only increase from year to year if output increase

+Formula: Price (base year) x Quantity (current year)

Market Basket of Goods: A relatively fixed set of consumer products and services valued and used on an annual basis to track inflation in a specific market or country.

Price Index: Measures inflation by tracking changes in the market basket of goods compare that with the base year.

+Formula:
(Price of market basket of goods (current year)/Price of market basket of goods base year) x 100

GDP deflation: Price index used to adjust form nominal to real GDP

+Formula:
(Nominal GDP/Real GDP) x 100

Inflation Rate formula:
[(New deflator - old deflator) / old deflator] x 100

*In base year, GDP deflator will be 100
  In years after base year, GDP deflator will be > 100
  In years before base year, GDP deflator is < 100

Unit 2 - Gross Domestic Product Pt.2

Expenditure Approach:
The expenditure approach consists of adding up the total of government expenses, consumption, net exports and investment that make up the Gross National Expenditure.
 + Formula:
           C       +                      Ig                        +          G         +      Xn          =   GDP
(consumption) (grss private dos. investment)   (govt.spending)  (net exports)

Income Approach:
The income approach and the output approach use the total of consumption, savings and taxation to yield the same results.
 +Formula:
   W    +   R   +    I     +   P     + Statistical Adjustment*  =  GDP
(wage)  (rent) (interest)(profit) 

*Statistical Adjustment included: 
- Indirect business taxes
-Net foreign factor income earned
-Corporation income tax 
-Dividents
-Undistributed corporation profit

Definition:

-Wage: Compensation of employee, salary supplementary, health, insurances, welfare 

-Rents: Tennet to land lord, a least payment by corporation for the use of their space

-Interest: Money paid by private business to suppliers of loan used to purchase capital

-Profit: Corporate income taxes, undistributed corporate profit, dividend



 

Unit 2 - Gross Domestic Product

National Income Accounting:
Economist collect statistics on production, income, investment and savings.

Gross Domestic Product (GDP):
It is the most important measure of economic growth, it represents the well being of the domestic economy of a country. It's the total dollar value of all final goods and services produced in that country within a year.

Gross National Product (GNP):
Total value of all final goods and services by citizens of that country on its land or foreign land.

What is included in GDP counting:
-Consumption (take about 67%)
-Gross Private Domestic Investment (construction of housing, factory equipment, unsold inventory of products built in a year)
-Government spending
-Net exports

What is NOT included in GDP counting:
-Intermediate goods (parts of final goods)
-Secondhand or used goods
-Non-market activities (illegal drugs, babysitting, volunteer)
-Financial transaction  (stock, bonds, real estate)
-Gifts (scholarship)
-Transfer payment

Unit 2 - Market Economy

Businesses and households, what is their relationship?

The circular flow diagram displays the relationship of resources and money between the firms, households and government branch through the two markets (factor and products).

 Above are two markets, firms (businesses) and households (we are the households). 

From the household, you will sell your outputs (i.e. labor) to the factor market, where the firms will buy your resources and you will receive the income in exchange for your labor (follow the green arrow).

The firms will use your resources to produce and sell the products to the goods market, where you as the household will buy the final goods and the money that you spent will be the firms' revenue, where they will use part of it to pay for your labor. 

In the middle of the diagram should be the government. The government plays both consumers and producers role in both market. They buy the resources from the factor market and the products from the goods market. They enforce the policies, laws and provide services to both firms and households from the taxes they've collected.

Watch the video for further explanation (:

 

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