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Understanding GDP: Key Concepts and Analysis Methods

Delve into the fundamentals of Gross Domestic Product (GDP), its components, measuring methods, and implications. Explore real vs nominal GDP, what GDP misses, and its impact on economic analysis.

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Understanding GDP: Key Concepts and Analysis Methods

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  1. Measuring a Nation’s Income Professor Chris Adam Australian Graduate School of Management University of Sydney and University of New South Wales

  2. INTRODUCTION • Macroeconomics – study of economy as a whole • Explain economic changes that affect many households, firms and markets at once • Consider data that are used to monitor overall economy

  3. GROSS DOMESTIC PRODUCT • GDP • Total income of everyone working in economy • Total expenditure on economy’s output of goods and services • For economy as a whole, income must equal expenditure • Circular flow diagram

  4. GROSS DOMESTIC PRODUCT • GDP is … the market value … use of prices … of all … external sales; imputation … final … vs intermediate … goods and services … tangibles and intangibles … produced … current production … within a country … vs Gross National Product … in a given period of time. quarterly; annually

  5. COMPONENTS OF GROSS DOMESTIC PRODUCT • Algebra! Y = C + I + G + NX Y is GDP C is consumption: household spending I is investment: spending that creates future income G is government: spending by government NX is net exports: exports (foreign-purchased, domestic-produced g&s) minus imports (domestic-purchased, foreign-produced g&s)

  6. MEASURING GDP • Three methods: • GDP expenditure: method described above • GDP income: sum of factor incomes, consumption of fixed capital, net indirect taxes • GDP production: market value of g&s produced minus cost of g&s used (“intermediate production”); also called “value added”

  7. DATA

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  17. REAL vs NOMINAL GDP • Increase of GDP(E) over time • We produced more g&s at the same prices? • We paid more for the same g&s? • Some combination? • Nominal GDP: value of g&s produced now using current prices • Real GDP: value of g&s produced now using previous (unchanging) prices

  18. REAL vs NOMINAL GDP Nominal GDP GDP deflator = x 100 Real GDP • Real GDP has grown over time but not constantly • GDP not measure “beauty of our poetry”, but can tell us if we can afford poetry

  19. WHAT GDP MISSES • Leisure reduction increases GDP but may reduce well-being • Removal of environmental regulation may increase GDP but reduce quality of environment • Use of market prices excludes non-market activities

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