Chapter 5.docx

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10 Apr 2012
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Chapter 5
GDP is the total income or total expenditures
For the entire economy the income equals the expenditure
Factors of production (Factor Payments): inputs such as labour (wages), Land (rent) and
Capital (Interest)
Both actors in the circular flow diagram are both buyers and sellers
Households take factors of production to the market then the firm uses the factors then
the firm take wages rent and profit to the market then it become income for the household
Firms take goods and services to the market then the goods and services are bought by
the household then the spending money of the household is taken to the market which
then becomes revenue for the firm
GDP is based on only the final goods of a good
GDP is produced within a current year with current produced goods
GDP(Y)= Consumption(C)+Investment(I)+Government Purchases(G)+Net Exports(NX)
Net Exports=Exports-Imports
Consumption: Total spending by households on goods and services
Investments: Total spending on goods that will be used on the future to produce more
goods
Government Purchases: Include spending on goods and services by local, territorial,
provincial and federal governments
GDP Total expenditures method is on exam
Nominal GDP: values output using the current prices it is not corrected for inflation
Real GDP: values output using the prices of a base year, is corrected for inflation
Nominal GDP is made up from each price for quantity for each individual year
Real GDP is made up from a price from one year for each quantity from each year
Real GDP is corrected for inflation
GDP Deflator= Nominal GDP/Real GDP*100
Inflation Rate can be computed by the percentage increase in the GDP deflator from one
year to the next
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