Chapter 20: Measuring Economic Activity and GDP

CHAPTER 20: Measuring Economic Activity

Gross Domestic Product

Is the most comprehensive measure of a nation’s production of goods and services

It comprises the dollar value of consumption ( C ), gross private domestic investment ( I ), government purchases ( G ), and net exports ( X ) produced within a nation during a given year.

Recall the formula:

GDP= C + I + G + X

The flow-of-cost approach uses factor earnings and carefully computes value added to eliminate double counting of intermediate products.

By use of a price index, we can “deflate” nominal GDP (GDP in current dollars) to arrive at a more accurate measure of real GDP

Net investment

Is positive when the nation is producing more capital goods than are currently being used up in the form of depreciation.

Disposable income ( DI )

is what people actually have left to spend on consumption or to save.

Inflation occurs when the general level of prices is rising

The most important price index

Consumer price index (CPI)

Traditionally measured the cost of a fi xed market basket of consumer goods and services relative to the cost of that bundle during a particular base year.

useful formulas

For calculating single-period growth of GDP:

Growth of real GDP in year t =

100 X GDPt - GDP t-1

GDPt-1

For calculating inflation with a single good:

Multiyear growth rate:

Net domestic product (NDP)

Equals the total final output produced within a nation during a year, where output includes net investment, or gross investment less depreciation: (NDP = GDP - depreciation)

Gross national product (GNP)

Is the total final output produced with inputs owned by the residents of a country during a year.