MeasuringGDP - Chapter 5: Measuring GDP and Economic Growth...

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Chapter 5: Measuring GDP and Economic Growth I. Introduction Measures of how economy is doing are important for firms, households, and policy makers. Output, unemployment, inflation are like vital signs Output is the most difficult to measure, so we will spend a lot of time on it
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II. GDP Definition Definition: Gross Domestic Product (GDP) is the market value of all of the final goods and services produced within a country in a given time period. 4 parts of definition 1. Market Value: Suppose the country of Gondor produces the following: 10 oranges 15 cloaks 6 swords Would it make sense to add them to get output? 10 + 15 + 6 = 31?
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1. Market Value - continued No. We have to put them in comparable units. We could weight them, so that all are in lbs/unit: Orange: 1/10 of a pound Cloak: 1 pound Sword: 8 pounds Total in weight: 10x1/10 + 15x1 + 6x8 = 64 pounds of output Oranges x lbs/orange + cloaks x lbs/cloak + swords x lbs/sword But this is not really what we want. We need to put the items in comparable units. We could weigh them. Not the measure
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1. Market Value – continued 2 How about using “market value” – prices? Price = $/orange etc. Orange: $0.50 Cloak: $40 Sword: $100 10 x $0.50 + 15 x $40 + 6x$100 = $1,205 This is how current dollar or nominal GDP is calculated. Market value is prices. $/unit How current dollar (or nominal) GDP is calculated
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2. Final Goods and Services Consider production of a car. Iron sand steel glass car tires rubber If we count value of tires + steel + car, we are double-counting. That is why we focus on final goods – the end product of the process. Production of a car. Many things go into producing a car. We cannot double count the production materials that are bought and sold. Only final goods going to consumers.
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1. Final Goods and Services – continued Intermediate goods: goods and services produced on the way to making the final good. Exeption: capital goods – factories, machines
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MeasuringGDP - Chapter 5: Measuring GDP and Economic Growth...

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