Jan 26 - Jan 26 Alternative approaches(2 Value-added...

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Jan 26 Alternative approaches (2) Value-added approach: GDP=Sum of value added by all firms (3) Factor (Resource) payments approach: GDP=Sum of firms’ factor payments = wages and salaries + interest + rent + profit =total household income=GDP=Y Nominal versus real FDP One final, very important problem: GDP is measured in dollars, and as a result a serious problem exists when tracking changes in output over time To see this, consider the following example: The country of Freedonia produces only one good, call it a widget. In each of 2003 and 2004 Freedonia produced 100 widgets [i] In 2003 the price of widgets was $1/widget 2003 nominal (dollar) GDP=$100 [ii] In 2004 the price of widgets was $2/widget 2004 nominal (dollar) GDP was $200 Clearly, one would not say the Feedonia produced twice as much output in 2004 as in 2003 The distinction between nominal and real value (1) The nominal (dollar) value of a variable is its current dollar value, uncorrected for the effects of inflation and any changes in money’s purchasing powers (2)
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