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IB Economics summaryGDP
GDP is the market value of all final goods and services produced within a country in
a given period of time.
Market value: output is valued at market prices
All final: GDP only records the value of final goods, not intermediate goods
(this is because the value is counted only once).
Goods and services: it includes tangible goods (food, cars) as well as
intangible services (haircuts, house cleaning)
Produced: the GDP includes goods and services produced in the period you
are considering, not transactions involving goods produced in the past.
Within a country: it measures the value or production within the geographic
confines of a country.
In a given period of time: it measures the value of production that takes places
within a specific internal of time, usually a year or 3 months (quarter).
GDP per capita measures the national income per head of the population.
For an economy as a whole, income must equal spending because:
- Every transaction has a buyer and a seller
- Every dollar of spending by some buyer is a dollar of income for some seller.
GDP includes all items produced in the economy and sold legally in markets. Not
counted:
- Items that are produced at home and that never enter the marketplace
- Items produced and sold illicitly, like illegal drugs
GDP = C + I + G + NX
C consumption: the spending by household on goods and services (buying new
house not included!)
I investment: spending on capital equipment, inventories and structures, including
new houses.
G government purchases: spending on goods and services by local and central
government (not including transfer payments because they are payments for which
no goods or service is exchanged)
NX net exports: export minus imports.
GDP per capita = GDP divided by the population of a country to give a measure of
national income per head.
Nominal GDP = production of goods and services at current prices
Real GDP = production of goods and services at constant prices
an accurate view of the economy requires adjusting nominal to real GDP by using
the GDP deflator.
GDP deflator tells the rise in nominal GDP that is attributable to a rise in prices rather
than a rise in the quantities produced.
GDP deflator = Nominal GDP / Real GDP x 100
Real GDP = Nominal GDP / GDP deflator x 100
, GDP is the best single measure of the economic well-being of a society.
• GDP per person tells us the mean income and expenditure of the people in the
economy.
• Higher GDP per person indicates a higher standard of living.
however, GDP is not a perfect measure of the happiness or quality of life. Not
included:
- Value of leisure (time off)
- Value of clean environment
- Value of activity that takes place outside of markets (time parents spend with
their children, value of volunteer work)
This is measured in HDI!
HDI = Human Development Index = summary measure of human development.
Long and healthy life, access to knowledge and a decent standard of living. Like this
you can measure the quality of life, and the happiness.
It helps to rank countries.
Measuring cost of living
Inflation is used to describe a situation in which the economy’s overall price level is
rising.
Inflation rate = % change in price level from the previous period.
Consumer Price Index = CPI = measure of overall cost of the goods and services
bought by a typical consumer.
when CPI rises, the typical family needs to spend more money to maintain the
same standard of living.
The CPI shows the cost of a basket of goods and services relative to the cost of the
same basket in the base year. Used to measure the overall level of prices in the
economy.
How to calculate CPI?
1. Fix the basket. What prices are most important to typical consumer? (ONS
Office of National Statistics identifies a market basket of goods and services
the typical consumer buys)
2. Find the prices. Find the prices of each goods and services in the basket for
each point in time.
3. Compute the Basket’s Cost. Use the data on prices to calculate the cost of the
basket of goods and services at different times.
4. Choose a base year and compute the index. Take one year as base year,
make it the benchmark against which other years are compared.
Compute the index by dividing the price of the basket in one year by the price
in base year x 100. CPI calculating: keeping quantities fixed and looking at
price each year. Indicator that provides information for governments on the
basis how they can develop.
5. Compute the inflation rate. The inflation rate is the % change in the price
index from the preceding period.
Calculating inflation rate:
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