3.2 Part 2: Measuring economic growth and living standards

Calculating grows domestic product (GDP)
1. Eco growth occurs when there is a rise in the real value of finished goods and services produced in Aus b/w one year and the next.
2. GDP is the most common measure. Prepared every quarter and four quarters show the annual rate of eco growth
3. Looking back at the circular flow novel, It's possible to see that the value of goods and services produced or GDP (flow no.4) can be estimated in three ways.
  1. The model assumes that the three flows of total expenditure on production (no.3 or AD) , total incomes paid to those selling resources (no.2) and total production (no.4 or GDP) are all exactly equal in value.
4. Estimates on GDP can be made in three different ways.
  1. 1. GDP (E)
    1. should be equal to the total annual market value of expenditure on final goods and services produced in Australia
      1. Basically AD
    2. GDP consists of the annual sum of private consumption (C) + investment spending (I) + government consumption (G1) + government investment spending (G2) + overseas spending on exports (X) - our import spending (M)
  2. 2. GDP (I)
    1. GDP should also be equal to the total value of incomes paid to those selling resources needed for production
    2. Incomes here include wages + salaries + supplements + profits of firms
  3. 3. GDP (P)
    1. GDP should also be equal to the total market value of final goods and services produced each year.
    2. equal to the value of production each year
    3. Value added in production refers to the total market value of sales - the cost of all inputs purchased by firms.
    4. Impossible to include all forms of production in GDP - this would be too complicated
      1. Some things are excluded from GDP such as the value of the black market, home duties like parenting and backyard DYI jobs.
Calculating chain volume GDP and allowing for changes in price levels.
1. Inflation and deflation affect the growth rate in market value of final goods and services produced each year.
  1. misleading impression of the actual size and change in the volume of g/s produced each year
2. Inflation would exaggerate the rise in market value g/s produced and sold while deflation would underestimate these values.
3. nothing was done to take these measures into consideration, GDP would be pointless
4. ABS now removes the impact that annual price changes would have on the value of production measured at current or market prices by using a measure called chain volume GDP.
5. Chain Volume GDP - market value of goods and services produced by Australia, adjusted to remove the effect on the value of national production caused by changes in prices against a reference year.
  1. uses a chain price index to help deflate the figures or inflate them
6. chain price index measures the average change in the prices of goods and services relevant to expenditure on GDP for the most recent year, against the prices that existed in a selected base year or reference year
  1. compare the statistics with the year just past
  2. annual revisions of GDP

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3.2 Part 2: Measuring economic growth and living standards

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