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Lecture 2

ECON 1010 Lecture Notes - Lecture 2: Potential Output, Factor Cost, Indirect Tax

Department
Economics
Course Code
ECON 1010
Professor
Gordana Colby
Lecture
2

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CHAPTER-4 MONITORING THE VALUE OF
PRODUCTION:GDP
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
old capital.
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.