ECON 1010 Lecture Notes - Lecture 2: Potential Output, Factor Cost, Indirect Tax
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CHAPTER-4 MONITORING THE VALUE OF
● GDP: Market value of all final goods and services produced within a country in a
given time period
● GDP= expenditure=income
● GDP= C+I+G+( X-M) Expenditure approach
● GDP= Y= C+I+G+(X-M) Income approach
● Gross means before deducting depreciation.
● Net means after deducting depreciation.
● Gross investment is the total amount spent on getting new capital and replacing
● Net investment is an increase in the value of a firm's capital. ( Net investment=
Gross investment- depreciation)
● Sum of all factor incomes = Net domestic income at factor cost.
● (Indirect tax- subsidies) + FC= MP
● Dep+ Net= Gross
●Real GDP: Value of final goods and services produced in an year and valued at
the prices of reference base year say 2007 dollars.
●Nominal GDP: Value of final goods and services produced in an year and valued
at prices of the same year. It is a MORE PRECISE name for GDP.
● Purpose of real GDP
○ To compare standard of living over time
○ To compare standard of living over countries.
●Real GDP per person- Real GDP divided by population. Tells value of goods
and services that an average person enjoys. Using real GDP removes the
influence of rising prices and a rising cost of living that might have been reflected
on the comparison.
● Value of real GDP when all labour, capital and entrepreneurship is fully employed
is called potential GDP.
● Features of expanding living standards-
○ Growth of potential GDP per person
○ Fluctuations of real GDP around potential GDP
● Lucas Wedge is dollar value of gap between what real GDP per person would
have been if 1960’s growth rate persisted and what is actually there.
● Business cycle is periodic but irregular up and down in economic activities.
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