Clear English summary of chapter 2 of the book Burda & Wyplosz. Conveniently divided by section and key terms are in bold. Part of the examination of, among other things the first year of Economics and Business, Fiscal Economics and Mr.drs. program. FEB11002 Macroeconomics.
Chapter 2: Macroeconomic Accounts
2.2 Gross Domestic Product
The gross domestic product (GDP) is a measure of productive activity. It is defined for a
particular geographic area over a time interval (year or quarter).
Flow variable. FE: gross domestic product; defined over a time interval (water down a river)
Stock variable. Those are defined with reference to a particular point in time (water in dam)
Three ways to measure GDP:
1) Definition 1:
GDP = the sum of final sales within a geographic location during a period of time, usually a
year.
Final sales = goods and services sold to the consumer or firm that will ultimately use them.
! A car sold to a dealer which is resold or a bread purchased by a grocery store are not final
but intermediate sales. Those sales are excluded from GDP to avoid double counting.
! Exports are always counted as final sales.
2) Definition 2:
GDP = the sum of value added occurring within a given geographic location during a period
of time.
A firm creates value added by transforming raw materials and unfinished goods into
products it can sell. The firm’s value added = sales - costs of raw materials, unfinished
goods, and imports from abroad. If the firm produces intermediate goods, the value added
should not be counted twice, and it is deducted from those customer’s own sales.
3) Definition 3:
GDP = the sum of factor incomes earned from economic activities within a geographich
location during a period of time.
Three points worth mentioning:
1. For comparison over time, we want to distinguish two reasons why GDP can increase:
(1) more real economic activity, and (2) higher prices for the same economic activity
2. For comparison across countries, we need to convert all GDP measures into a
common currency. Use the concept of purchasing power parity.
3. Small countries tend to have small GDP, and yet they may be well-off. Therefore,
look at GDP per capita = GDP / population.
Nominal GDP (or GDP at current prices) = PaQa + P0Q0
This is to calculate the final sales by multiplying the quantities and their respective prices.
An increase in nominal GDP can result from either higher prices or more output. To separate
the effects of output and price movements, national income accountants distinguish
between nominal and real GDP.
Nominal GDP (and all nominal variables) represent values at current prices.
Real GDP (and all real variables) represent volumes at constant prices (use a base year).
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