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ECON 2006--Chapter 6 Notes

by: Shannon Cummins

ECON 2006--Chapter 6 Notes ECON 2006

Shannon Cummins
Virginia Tech
GPA 3.34
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About this Document

These notes cover all things GDP; its definition, how it can be used to measure living standards, and its downfalls. Includes formulas and examples.
Principles of Economics
Class Notes
Econ, ECON2006, GDP, Gross, domestic, Product, Chapter, 6




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This 3 page Class Notes was uploaded by Shannon Cummins on Monday August 29, 2016. The Class Notes belongs to ECON 2006 at Virginia Polytechnic Institute and State University taught by Staff in Fall 2016. Since its upload, it has received 3 views. For similar materials see Principles of Economics in Macroeconomics at Virginia Polytechnic Institute and State University.

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Date Created: 08/29/16
Gross Domestic Product—8.24.2016 Gross domestic product (GDP) – 1. The market value 2. Of all final goods 3. And services 4. Produced within a country 5. During a specific period. 1. Market value is essentially price. Without knowing the price of each item, we cannot calculate GDP.  GDP = sum of all (good * price) 2. Intermediate goods – goods that a firm repackages or bundles with other goods for sale at a later stage. **Final goods – goods sold to consumers. These are the goods included in GDP. 3. Services are the intangibles (i.e. health care, education, transportation). 4. PRODUCED in the country. Nike is an American company but the shoes are produced in Thailand. Nike’s production is included in Thailand’s GDP, not the United States’. 5. This is done to avoid double-counting.  Resale does not count. The item is produced when it is built/assembled and originally sold. GDP = Consumption + Investment + Government purchases + Net eXports  Consumption = everything that household consumers buy. o Exception: new housing  Investments = everything that firms buy. o Includes: new housing o Includes: inventory—because the items are produced by a firm in a specific time period to be sold at a later time o Exception: bonds and shares—because these are used to by other things, which are included in GDP. Avoids double counting!  Government purchases = government expenses. o Includes: payments for building roads, cars, salaries for gov. employees o Exception: transfer payments (i.e. welfare, social security)  Net exports = eXports – iMports. o Why we subtract imports: Those imports will be used, increasing either C, I, or G. Subtracting evens out the GDP, making sure there is no increase for the country that did not produce them. 8.26.2016 Measuring living standards –  Total GDP: may not be a good indicator of living standards for the average person because it does not account for population  Per capita GDP: GDP/population. This accounts for population and determines the average GDP per person Economic growth – 1. The percentage change in 2. Real 3. Per capita GDP. 1. (GDPt– GDP t-1DP t-1* 100 Over time 2. Real GDP accounts for inflation. Without this, GDP may rise without any real change in Specific purchasing power. GDP point in time  Real GDP = (Nominal GDP/Price Level) * 100 % change Nominal % c% change Price Level =ounts for population size of a country. 8.29.2016 Looking at the business cycle—  Peak  Trough  Contraction  Expansion Shortcomings of GDP:  Nonmarket goods are not included in GDP o Nonmarket goods – goods that are produced but never sold  Underground economy o Underground economy – hidden, uncounted transactions o Legal (such as tips) or illegal (drug exchange)  The quality of the environment cannot be measured with GDP. Quality of life may be different while GDP is the same!  Leisure time. GDP does not capture how long it takes to produce goods and services.


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