Gross Domestic Product (GDP)
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Total dollar value of all goods and services,
produced within a countries borders, and within a given year
-
EX. If I was a citizen in Bangladesh Countries
GDP and on GNP
·
Gross National Product (GNP)
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Total value of all final goods and services,
produced by Americans in a year
-
EX. Work in Bangladesh but citizen of America,
where ever I work is put into the GNP
·
Gross Domestic Product
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Included in GDP
Ø
Formula (C + Ig + G + Xn)
Ø
C-Consumption
o
67% of our money of the economy - (must be final good or service)
Ø
Ig Gross Private Domestic Investment
- Factory Equipment Maintenance
- Factory Equipment Maintenance
- New factory equipment
- Construction or housing
- Unsold Inventory of products built in a year (GDP 2014)
Ø
G- Government Spending
Ø
Xn- Net exports
Exports – Imports
-
Whats not included in GDP
Ø
Non-market activities (volunteering, family
work, illegal drugs)
Ø
Intermediate goods- goods and services that are
sold for resale or in further process (Making into a good)
o *Avoid Double and Multiple counting*
Ø
Used or second goods
o
Ex. Thrift store counted 5 years ago, car 2003
sold for 2015.
Ø
Financial transaction- Stocks, bonds,
real-estate
Ø
Gifts or Transfer Payments
o
Public- Recipients contribute nothing to the
current production (Ex. Welfare payments, Social Security)
o
Private- produce no output this is where you
transfer funds one private individual to another ( Ex. Scholarship)
January 28, 2015
Calculate GDP
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Expenditure Approach
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Add up the market value of all expected
expenditure
-
C+Ig+ G+ Xn = GDP
-
Add up all the income earned by households and
firms in a single year
-
Income Approach
-
W+R+I+P+ Statistical
-
Wages rents interest profit (Properties income)
-
GDP must equal the income
-
Formulas
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Budget
o
Government purchases of goods and services +
Transfer Payments – Government tax and fee collection
o
If your number is positive it’s a deficit if it
is negative its surplus
-
Trade
o
Export- Imports
-
GNP
o
GDP + Net Foreign factor payment
-
NNP (Net national Product)
o
GNP-Depreciation
-
NDP (Net domestic product
o
GDP-Depreciation
-
National Income
o
Either one
§
GDP – Indirect business taxes- Depreciation –
fact foreign payments
§
Compensation of employees + rental income +
interest income + proprietors income + corporate income
-
Disposable Personal Income
o
National income – personal household taxes + government
transfer payments
January 29, 2015
Ø
Nominal GDP
-
Value of output produced by current prices.
-
Nominal price x quantity
-
Can increase year to year if either output or
price increase
Ø
Real GDP
-
It is the value of output produced in constant
or based year prices
-
Price x quantity
-
Can increase year to year only if output
increase
-
The reason why Real GDP adjusted for
-
Current year x Base year
Ø
Price index- By tracking changes in the price of
in market basket of goods compared with the base year
-
Price of Market basket in current/ Price of
market basket of goods in base year x 100
Ø
GDP Deflator- is a price index used to adjust
from nominal to real GDP
-
In the base year GDP deflator will = 100
-
Years after the base year GDP deflator > 100
-
Years before the GDP deflator < 100
- Nominal GDP/ Real GDP x 100
February 2, 2015
Ø
Inflation- Rise of general level of prices, the
standard is 2-3%
-
The inflation rate percentage increase in the
price level overtime it is the key indicator of the economy’s health
Ø
Deflation- Decline in the general price level
(Item is $20 to $15)
Ø
Disinflation- Is when the deflation declines
itself
Ø
CPI (Consumer Price Index)- Measures inflation
by tracking the yearly price of a fixed basket of consumer goods and services
-
In addition CPI indicates changes cost of living
and price level.
Ø
Solving Inflation Problems
-
Inflation rate using market basket data
o
Current year market basket value – base year
market basket value/ base year market basket value x 100
-
Inflation rate using price index
o
Current year price index- base year price index/
base year price index x 100
-
Estimating inflation using the rule of 70
o
The rule of 70 is used to calculate the number
of years it will take the price level to double at any given rate of inflation.
o
Years needed to double inflation = 70/ annual
inflation rate
-
Determining real wages (Unit 3 repeated again)
o
Real wages= Nominal price/ price level x 100
-
Find Real interest rate
o
Real interest= nominal rat e-inflation premium
o
Real interest rate- the cost borrowing or
lending money adjusting to expected inflation, nominal rate is expressed as
percentage.
o
Nominal Interest rate- unadjusted cost of
borrowing or lending money.
Ø
Causes of Inflation
-
Demand - pull Inflation- caused by an excess of
demand over output that pulls prices upward.
-
Cost push Inflation- caused by a rise in per
unit production cost due to increasing resource cost.
Ø
Effects of Inflation
-
Anticipated- expecting it, cost of inflation
adjusted, wages adjusted.
-
Unanticipated- (Had a day off but the boss said
o
Hurt by Inflation
-
Fixed Income (Social Security etc.)
-
Savers
-
Lenders/Creditors
o
Helped by Inflation
-
Borrowers (Debt would be repaid with cheaper
dollars than those that is originally loaned out)
-
Fixed Contract
