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Gross domestic product (GDP)
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the market value of all final goods and services produced within a country in a given period of time
- value of production = expenditure on final goods and total income
- value of production = expenditure on final goods and total income
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Market Value
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goods and services are valued at their market price
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Final goods and services
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an item bought by its final user during a specified time period
- excluding intermediate goods prevents double counting
- excluding intermediate goods prevents double counting
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Produced within a country
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domestic production
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In a given period of time
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production during a specific time period
- normally year or quarter of a year
- normally year or quarter of a year
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Circular flow diagram
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shows the transactions among households, firms, governments, and rest of the world
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Households & firms
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Households sell and firms buy the services of labor, capital, and land in factor markets
- firms pay income to households: wages, interest for use of capital rent for use if land
- entrepreneurship receives profit
-firms sell and households buy consumer goods and services in the goods market
- firms pay income to households: wages, interest for use of capital rent for use if land
- entrepreneurship receives profit
-firms sell and households buy consumer goods and services in the goods market
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consumption expenditure
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total payment for consumer goods and services
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Investment
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the purchase of new plant, equipment, and buildings and the additions to inventories
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Governments
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buy goods and services from firms
-their expenditure on goods and services is government expenditure
-finance their expenditure with taxes and pay financial transfers to households (not part of the diagram)
-their expenditure on goods and services is government expenditure
-finance their expenditure with taxes and pay financial transfers to households (not part of the diagram)
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Exports
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Canada sells goods and services to the rest of the world
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Imports
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buy goods and services from the rest of the world
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net exports
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the value of exports minus the value of imports
-positive: net flow of goods and services is from Canada to the rest of the world
-negative: net flow of goods and services is from the rest of the world to canada
-positive: net flow of goods and services is from Canada to the rest of the world
-negative: net flow of goods and services is from the rest of the world to canada
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GDP Equation
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Y= C + I + G + (X-M)
-income equals expenditure
-income equals expenditure
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Aggregate income
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the total amount paid for the use of factors of production: wages, interest, rent, and profit
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What does gross mean?
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before deducting the depreciation of capital
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What does net mean?
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after deducting the depreciation of capital
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Depreciation
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the decrease in the value of a firm's capital that results from wear and tear and obsolescence
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Gross investment
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the total amount spent on purchases of new capital and on replacing depreciated capital
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Net investment
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increase in the value of the firms capital
- Net investment = Gross investment - Depreciation
- Net investment = Gross investment - Depreciation
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Real GDP
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the value of final goods and services produced in a given year when valued at the price of a reference base year
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Nominal GDP
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the value of final goods and services produced in a given year valued at the prices that prevailed in that same year
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Real GDP used to:
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- compare the standard of living over time
- compare the standard of living across countries
- compare the standard of living across countries
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Real GDP per person
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real GDP divided by the population
- tells us the value of goods and services that the average person can enjoy
- growth potential shows features of expanding living standards
- real GDP removes any influence that rising prices or rising price of living can cause
- tells us the value of goods and services that the average person can enjoy
- growth potential shows features of expanding living standards
- real GDP removes any influence that rising prices or rising price of living can cause
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Potential GDP
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The value of real GDP when all the economy's factors of production—labor, capital, land, and entrepreneurial ability—are fully employed
- a feature of expanding living standards
- a feature of expanding living standards
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Business Cycle
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a periodic but irregular up-and-down movement of total production and other measures of economic activity
- 2 phases: expansion & recession
- 2 turning points: peak and trough
- 2 phases: expansion & recession
- 2 turning points: peak and trough
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Expansion
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real GDP increases (trough to a peak)
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Recession
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real GDP decreases (growth rate neg for at least 2 successive quarters)
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Problems when using real GDP to compare living standards:
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1) real GDP of one country must be converted into same currency units as the real GDP of another
2) goods and services in both countries must be valued at the same prices
2) goods and services in both countries must be valued at the same prices
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What does real GDP measure?
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the value of goods and services that are bought in markets
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Factors that influence standard of living (not in GDP):
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1) household production
2) underground economic activity
3) health and life expectancy
4) leisure time
5) environmental quality
6) politcal freedom & social justice
2) underground economic activity
3) health and life expectancy
4) leisure time
5) environmental quality
6) politcal freedom & social justice
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