Measuring Domestic Output and National Income
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What is the definition of GDP?
The total market value of all goods and services. GDP is a measure of Aggregate Output.
What are the 3 types of transactions that would not be included in GDP?
Pubic Transfer Payments- Welfare, Social Security
Private Transfer Payments- Parent to Child
Stock and Bond Market Transactions- Include the payment to the Broker.
What are the Components of GDP using the expenditures approach?
- 1) Consumption by Households
- 2) Investment by Businesses
- 3) Government Purchases
- 4) Expenditures by Foreigners
1) Consumption by Households
Personal Consumption Expenditures (C)
Aggregate Spending on:
- Durable consumer goods
- Non-durable consumer goods
- Consumer Expenditures for Services
2) Investment by Businesses
Gross Domestic Investment (Ig)
Aggregate Spending by Business inside the Country on:
- Machinery, Equipment, Tools
- All Construction
- Changes in Inventories
- Creation of new Capital Assets
3) Government Purchases (G)
- Expenditures for Goods & Services
- Expenditures for Social Capital-Schools, Highways
- Does not include government transfer payments
4) Expenditures by Foreigners
Net Exports (Xn)
Gross Domestic Product=
C + Ig + G + Xn
What is Nominal GDP?
Nominal GDP is a dollar measure of current prices.
What is Real GDP?
Reflection in changes in prices. GDP is a dollar measure of production,
What are the Shortcomings of GDP?
- Non market Activities-
- Services of homemakers not counted
- Value of leisure underestimated
- Improved Product Quality-
- Not counted
Composition and Distribution of Output- Does not measure well being
- GDP and the Environment-
- Social and environmental costs not counted
- The Underground Economy-
- Not counted
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