PEco Module 11

• Gross Domestic Product (GDP) is the market value of all final goods & services produced within a country in a given period of time.
• GDP is related to a nation’s total income and spending.
• The components of GDP are consumption, investment, government spending, and net exports.
• GDP is corrected for inflation.
• GDP does not measure society’s well-being.
• Economics is divided into Microeconomics, the study of how households and firms make decisions interact in markets, and Macroeconomics, the study of economy-wide phenomena including inflation, unemployment, and economic growth.
• Gross Domestic Product (GDP) measures total income of everyone in the economy and total expenditure on the economy’s output of goods and services.
• Income equals expenditure for the economy as a whole because every dollar a buyer spends is a dollar of income for the seller.
• The Circular-Flow Diagram is a simple depiction of the macroeconomy that illustrates GDP as spending, revenue, factor payments, and income.
• Factors of production are inputs like labor, land, capital, and natural resources.
• Factor payments are payments to the factors of production (e.g., wages, rent).
• Households own the factors of production, sell/rent them to firms for income, buy and consume goods & services.
• Firms buy/hire factors of production, use them to produce goods and services, sell goods & services.
• Households and firms interact in markets for factors of production.
• GDP includes all items produced in the economy and sold legally in markets.
• GDP excludes most items produced and sold illicitly.
• Real GDP is measured using the prices of a constant base year and is corrected for inflation.
• Nominal GDP is measured using current prices.
• GDP is the main indicator of a country’s economic well-being, even though it is not perfect.
• Gross Domestic Product (GDP) measures a country’s total income and expenditure.
• The four spending components of GDP include: Consumption, Investment, Government Purchases, and Net Exports.
• Nominal GDP in 2014 was $6000 and in 2016 it was $10,800, representing a 30.9% increase.
• The GDP deflator is a measure of the overall level of prices.
• Real GDP is corrected for inflation.
• The change in real GDP is the amount that GDP would change if prices were constant (i.e., if zero inflation).
• The GDP deflator equals 100 times the current level of prices relative to the level of prices in the base year.
• The GDP deflator measures the economy’s inflation rate.
• The GDP deflator can be used to compute the percentage increase in the GDP deflator from one year to the next.
• The GDP deflator in 2014 was 100, in 2015 it was 114.6, and in 2016 it was 128.6, representing a 14.6% increase from 2014 to 2015 and a 12.2% increase from 2015 to 2016.
• Real GDP in 2014 was $6000 and in 2016 it was $8400, representing a 37.5% increase.
• The change in nominal GDP reflects both prices and quantities.
• Real GDP is measured using constant prices from the base year (2014 in this example).
• GDP is the market value of all final goods and services produced within a country in a given period of time.
• GDP includes currently produced goods, not goods produced in the past.
• Business capital includes business structures, equipment, and intellectual property products.
• Consumption (C) is total spending by households on goods and services.
• GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.
• Final goods are intended for the end user.
• For homeowners, Consumption (C) includes the imputed rental value of the house, but not the purchase price or mortgage payments.
• Government Purchases (G) exclude transfer payments like Social Security or unemployment insurance benefits.