ECON1020 Study Guide - Midterm Guide: Frictional Unemployment, Human Capital, Industrial Revolution
ECON1020 MIDSEM REVISION SHEET
TOPIC 1: GDP
What Does GDP Mean?
❖ "Gross" = total
❖ "Domestic" = "geographical boundary”, typically a country’s borders.
❖ "Product" = output
• Widely cited economic metric in the world
❖ GDP measures the total market value of all final G&S (goods and services) newly produced in a specified
country or region during a specified period (e.g. a year or a quarter)
❖ Generally speaking, GDP is a measure of the size of an economy and its composition; (how big is the country in
terms of economics; which country produces the most goods and services in the world)
❖ Knowing the correct size of an economy and the relative sizes of different economies have important policy and
business implications
GDP (current US$)
GDP 2016 (Current Price)
Why are GDP Statistics Important?
❖ Business and financial companies need to know how big an economy is now and in the near future (i.e., how
fast it is growing or contracting) in order to work out
how much sale they can make in that economy
and therefore how much they need to produce and invest.
• You need customers --> more goods ---> more sales ---> more profit ---> more successful company
• Captures the potential of a country, how much they can consume/priduce
Why Does it Matter to be Large?
v Larger countries have bigger influence in their region and beyond because they
² provide a larger market for other countries’ exports
² afford to make more investment overseas
² afford to promote its culture and value overseas – soft power (e.g., Confucius Institute, British Council,
Alliance Francaise, Goethe Institute)
² afford larger contributions to international organizations (e.g., IMF, World Bank) and thus have a bigger say
in their policies and decisions or even to challenge them
² afford larger military expenses.
• USA consumes the most (huge market for other countries)
Includes & Excludes
❖ Includes – newly produced final, market G&S
• Newly produced = A house in 1945 was $30,000 and was recorded into GDP in 1945
o However, it gets sold in 2018 for $3 million and 2018 GDP is $0 BECAUSE THE HOUSE IS ALREADY THERE
(its not an addition to the production to the country)
o If you build a garage in the house in 2018 for $50, 000 + $150,000 commission (services to sell it in
2018) THEN THE GDP would be $200,000 BECAUSE it’s a new addition
Excludes intermediate G&S
• cant consider G&S when calculating GDP because double counting will happen. WHAT IS
CONSUMED BY THE CONSUMER IS CALCULATED INTO GDP (FINAL G&S); e.g milkshake = the
contents are an intermediate good for input -- used for further sale ---
• If a restaurant doesn’t file for a tax return, ATO will charge the restaurant what they sold (for
example; apple milkshake is $10; contents are $2 apple, $3 milk and $1 sugar), they will charge the
restaurant $6 and charge the suppliers with what they sell their supplies for, thus it works out its
self as $apple profit + $milk profit + $sugar profit+ $6 = $10
Excludes financial assets
• These are claims on somethings; they are not G&S. E.g., shares are claims on company ownership;
bonds are claims on financial payments.
• For e.g balance sheet
• Financial assets = claim on physical assets in an economy
Excludes informal sector
• Lawn mowing, babysitting isn't recorded to GDP because it is not recorded
Excludes domestic work
• (services provided by owner-occupied dwellings are included though) e.g maids, housewife
Excludes illegal activities
• (practices vary by countries)
• E.g drugs (you wont record it to the ATO)
• Total = everything that is produced in a country
• Market value = don’t know how many goods there are; one thing that is common for goods and services that
are produced and sold in the market is that, they have a dollar value [everything that is sold and produced is
for a dollar amount];
o EXAMPLE: selling a pen for $2 and a pencil for 50¢, the GDP/market value would be $2 + 50¢ = $2.50
(you don’t know what a pen/pencil means, but you do know what dollars and cents mean)
World Example: Shadow Economy
❖ From Oct 2014 onward, under the EU guideline, Italy, Spain and the UK include drug trafficking, prostitution,
and alcohol- and-tobacco smuggling into its GDP
❖ This revision boosts the UK's 2009 GDP figure by £9.7bn or 0.7%.
… produced in an economy …
❖ Where – within a specified country (e.g., Australia) or region (e.g., Euro Zone)
Australia's GDP excludes production by Australian firms operating overseas
Exclude imports
• For example, if Americans produce supplies in Australia, their final outputs would be INCLUDED in the
AUSTRALIAN GDP and NOT the AMERICAN GDP
o The profits will go to America, but since they are producing in Australia, it will be included in the
Australian GDP
• Doesn’t matter WHO owns it, it matters WHERE it is located
… during a specified period …
❖ When – during a specified period, e.g., year 2014 or 2014Q3
2014 GDP excludes second-hand goods made before 2014
But include the services of selling second- hand goods produced during 2014
