Chapter 2 eco 202.docx

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Chapter 2 eco 202 Aggregate output in the national income account is gross domestic product (GDP) GDP is the main economic variable Three ways of thinking about an economy’s gdp : GDP is the value of fina l goods and services produced in the economy during a given period o Intermediate goods, a good used in the production of the final goods, should not be counted in GDP GDP is the sum of value added in the economy during a given period o The value of its production minus the value of the intermediate goods it uses in production. GDP is the sum of incomes in the economy during a given period (income side) o The the sum of indirect taxes, labour income(wages) and capital income (profit) o SUMMARY OF AGGREGATE OUTPUT - GDP (national income and expenditure accounts) Output side : GDP is equal to the value of the final goods and services produced in the economy during a given period Output side : GDP is the sum of value added in the economy during a given period Income side : GDP is the sum of labour income, capital income and indirect taxes Nominal and Real GDP Nominal GDP – the sum of the quantities of final goods produced times(*) their current price. Nominal GDP increases over time for two reasons. The production of most goods increases over time. The prices of most goods also increase over time. Real GDP – to measure production and its change over time, we need to eliminate the effect of increasing prices. The sum of the quantities of final goods times(*) constant prices(base price) Nominal GDP is also called dollar GDP or GDP in current dollars Read GDP is also called GDP in terms of goods, GDP in constant dollars, GDP adjusted for inflation or GDP in 2007 dollars The year real GDP equal to nominal GDP is 2007
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GDP growth Y t = Real GDP in year t $ Y t = Nominal GDP in year t GDP growth in year t
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