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Macroeconomics Final Exam - Chapter 4

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  • GDP

    Gross Domestic Product: the market value of final goods/services produced in a country in a given time period

    • is equal to the total expenditure on final goods and total income

  • Income Approach

    Net GDP= wages + OFI

    Gross GDP= wages + OFI + Depreciation

    OFI - Other Factor Income

    • Rent

    • Interest

    • Profit

    Y= total income paid by firms to households

    Gross Domestic Income at Factor Cost

  • Net -

    After deducting the depreciation fo Capital

    • decrease in value of a firms capital

    Net Investment = Gross Investment - Depreciation

    Gross Investment = total amount spent on new capital

  • Expenditure Approach

    Y= C+G+I+X-M

    C = consumption

    I = investment

    X = exports

    M = imports

    G = government expenditure

    Valued at Market Cost

  • Factor Cost -> Market Cost

    • Add indirect taxesless subsidies to gross domestic income

    • Called GDP at basic prices - doesn't = GDP at market prices

    • GDP is the average of the two totals and redistributes half of the discrepancy

  • Real GDP

    Value production in a year when valued at the prices of a reference based year

    • used to compare the standard of living over time and across countries

  • Nominal GDP

    Value production in a year when valued at the prices that prevailed in that same year

  • Real GDP per person

    Real GDP/ Population

    • value of what the average person can enjoy

  • Long- Term Trend

    Real GDP/ Population over time expressed as a ratio of some reference year

  • Potential GDP

    • value of real GDP when all the economy's labour, capital, land and entrepreneurial ability are fully employed

    • maximum quantity of real GDP that can be produced

  • Business Cycle

    Phases

    1. Expansion

      • Real GDP increases

    2. Recession

      • Real GDP decreases - at least two successive quarters

    Turning Points

    1. Peak

    2. Trough

  • Chained-Dollar Real GDP

    • value production in the prices of adjacent years

    • Find the averages of the two percentages changes

    • link (chain) to the reference year

  • Real GDP doesn't consider...

    • Household Production

    • Underground economic Activity

    • Leisure Time

    • Environment Quality