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ECON 1010 Study Guide - Midterm Guide: Gdp Deflator, Real Wages, Unemployment


Department
Economics
Course Code
ECON 1010
Professor
Steven Edwards
Study Guide
Midterm

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Ch. 20 Measuring GDP and Economic Growth
GDP - the market value of all final goods and services produced within a country in a given time period
Final good item bought by the final user
Intermediate good item produced by one firm, bought by another to be used as a component of a final
good
GDP and the Circular flow of expenditure and income
The circular flow shows the transactions between households, firms, government, and the rest
of the world
Y = Income paid to households by firms for labour, land, capital and entrepreneurship (factors of
production)
C = Consumption expenditure the total $ paid for consumable goods and services
I = Investment the purchases of new capital (tools, equipment, buildings, etc.) made by firms
G = Government expenditure the goods and services purchased from firms by government
(X-M) = Net exports = Exports imports (= amount of goods sold to rest of world amount of goods
bought from rest of world)
Y = C + I + G + X - M
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Circular flow shows two ways of measuring GDP:
Expenditure approach
o GDP = total expenditure = C + I + G + (X-M)
Income approach
o GDP = total income = Y = Net direct income at factor cost + taxes less subsidies +
depreciation
Wages + rent + interest + profits = net domestic income at factor cost
Net domestic product (NDP) = GDP depreciation
Depreciation the derease i the alue of a fir’s apital that results fro ear ad tear
Gross investment the total amount spent on purchases of new capital and on replacing depreciated
capital
Net investment the increase in the alue of the fir’s apital
Net investment = Gross investment Depreciation
Real GDP the value of final goods and services produced in a given year when valued at valued at the
prices of a reference base year
Real GDP is measured i the referee ase ear’s dollars
Nominal GDP the value of goods and services produced during a given year valued at the prices that
prevailed in that same year
Nominal GDP is just a more precise name for GDP
Economists use estimates of real GDP for two main purposes:
To compare the standard of living over time
To compare the standard of living across countries
Real GDP per person = Real GDP/total population
Represents the standard of living
Two features of our expanding living standard are
The growth of potential GDP per person
Fluctuations of real GDP around potential GDP
Potential GDP = real GDP at full employment (all factors of production maximized/used most efficiently)
Real GDP fluctuates around potential GDP
These fluctuations create the business cycle
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The Business Cycle a periodic but irregular up-and-down movement of total production and other
measures of economic activity
Every cycle has two phases:
1. Expansion increase in real GDP
2. Recession decrease in real GDP
Every cycle also has two turning points:
1. Peak (end of expansion and start of recession)
2. Trough (end of recession and start of expansion)
Problems comparing standard of living using GDP:
1. The real GDP of one country must be converted into the same currency units as the real GDP of
the other country
2. The goods and services in both countries must be valued at the same prices across countries
Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in
equilibrium when their purchasing power is the same in each of the two countries
Limitations of Real GDP as a measure of standard of living
Real GDP measures the value of goods and services that are bought in markets
There are factors that influence the standard of living and that are not part of GDP incl:
o Leisure time
o Environmental quality
o Political freedom and social justice
Despite this, GDP remains one of the most common indicator of economic well-being
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