econ test

Study Guide for Chapter 8

Chapter 8: GDP

Learning Objective:

1. Describe GDP and calculate GDP using different approaches (expenditure approach & value-added approach).

2. Examine whether GDP is a good measure of well-being.

3. Discuss the difference between real GDP and nominal GDP, calculate and interpret both nominal and real GDP.

***Skip 8.4

Section 8.1 : measuring GDP

What is GDP (slide 4)?

-Market value, not quantities. Why? You cannot add apples and oranges together.

-Final goods (sold to final users who want to enjoy them by themselves), not intermediate goods (used to produced other goods, such as computer chips.): Considering that value of final goods already includes the value of all intermediate goods, adding up the value of all intermediate goods to GDP separately is “double-counting”. For example, the value of computer chips is already added to the value of computers.

-Currently produced: buying or selling used goods shouldn’t be a part of GDP. For example, the value of inventories (i.e., unsold products) produced in 2019 is not a part of GDP in 2020, but a part of GDP in 2019.

-Produced within the U.S. borders: Include “made in U.S.” items only, not imported ones. For example, buying French wine by Americans (=imports) is not a part of the U.S. GDP, but a part of French GDP (=exports)

Expenditure approach (slide 5-10)

Components of GDP (or expenditure approach: slide 5-10)

-Personal consumption expenditure (C)

-Gross private domestic investment (I): pay attention to change in business inventories. For example, if inventories increase $50 billion in 2019, it will increases investment in 2019 by $50 billion.

-Government purchases (G): keep in mind that it excludes transfer payments, such as social security benefit or unemployment compensation…

-Net export (NX): add the amount of exports and subtract the amount of imports.

Value-added approach:

sum of all the value-added (=total revenue- the cost of all the intermediate goods)

***Pay attention to the expenditure approach (GDP = C + I +G + NX). It is very important. When I give you a numerical example, you should know how to calculate GDP using expenditure approach.

Section 8.2 : Is GDP accurate?

Shortcomings in GDP: not accurate. Why?

Measure of total production (slide 20):

doesn’t count household production and underground economy (see slide 20 ). For example, how does legalizing marijuana affect GDP? Increase or decrease?

Measure of well-being (slide 21): Increase in real GDP doesn’t guarantee improvement in people’s well-being. Why? (see slide 21)

Section 8.3 : Real vs. Nominal GDP (very important)

What makes differences (slide 23 & 25)?

Both of them use quantities in the current year, but Nominal GDP uses prices in the current year, while real GDP always uses prices in the base-year. After you calculate the example (slide 24), examine why Real GDP and Nominal GDP are different.

Calculating nominal and real GDP (slide 24)

You should know how to calculate GDP (both nominal and real) with data (see slide 24 ):

***Also, see the answer key for the worksheet2-ch8 on the modules.

GDP deflator (or GDP price index)

Understand the formula and know how to calculate GDP deflator with data.

Use the data in slide 24, calculate both GDP (nominal & real) and GDP deflator (see slide 27).

GDP deflator2019 = Nominal GDP2019 /Real GDP 2019 x 100 =

***DO NOT forget to practice mock exam & worksheet