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Special Topics in Economics Econ. 491

Special Topics in Economics Econ. 491. Chapter 2: Understanding Economic Indicators (National Output and Income). Gross Domestic Product (GDP): - Measures the total value of goods and services produced by people, businesses , governments, and property located in the country.

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Special Topics in Economics Econ. 491

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  1. Special Topics in Economics Econ. 491 Chapter 2: Understanding Economic Indicators (National Output and Income)

  2. Gross Domestic Product (GDP): - Measures the total value of goods and services produced by people, businesses , governments, and property located in the country. - GDP is the broadest available measure of US economic activity. - There are two ways to look at GDP: Spending approach and Income approach.

  3. - GDP is computed both in nominal (current-dollar) and real (inflation-adjusted) terms. - Nominal GDP is the market value of all final goods and services produced in a year. - Nominal GDP is calculated using the current prices prevailing when the output was produced (P x Q), but real GDP is a figure that has been adjusted for price level changes.

  4. - GDP includes the following main factors: (1) personal consumption expenditure, Includes durable goods , nondurable goods and services. (2) business investment in structures, equipment and software, • All final purchases of machinery, equipment, and tools by businesses. • All construction (including residential). (3) government consumption and investment, Includes spending by all levels of government (4) net exports ( exports – imports) Net exports is the difference: and can be either a positive or negative number depending on which is the larger amount.

  5. Converting Nominal to Real Problem: valid comparisons cannot be made with nominal GDP alone, since both prices and quantities are subject to change. Solution: making an adjustment process by converting the nominal to real. One method: first determine a price index, and then adjust the nominal GDP figures by dividing by the price index (in hundredths).

  6. GDP Price Index Use price index to determine real GDP Price of Market Basket in a specific Price Index = x 100 Price of Same Basket n Base Year Nominal GDP Real GDP = Price Index (in hundredths) • 24-6

  7. Calculating Real GDP (Base Year = 2000) GDP Price Index • 24-7

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