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GROSS DOMESTIC PRODUCT GROSS DOMESTIC PRODUCT (GDP

)
Total market value of all final goods and services produces within a country in a given time

WHAT DOES NOT INCLUDE GDP
1. 2. Products that produced outside the country Products produced illicitly

   

Consumption: Spending by households (does not include purchases of new housing) Investment: Spending on capital investment (new buildings or machines for the company) Government purchases: Spending by local federal governments (computers bought by local council ) Net exports: Exports minus imports

CIRCULAR FLOW DIAGRAM – TWO SECTOR ECONOMY

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TIPS
  Intermediate goods are not included in GDP (clothing produced by one company which is later sold to another company to make clothing) Do It Yourself activities (table made by James at his house and sold in a community amrket)

CALCULATING GDP
1. 2. 3. Expenditure method Production method Income method

EXPENDITURE METHOD
GDP(Y) = consumption(C) + investment (I) + government purchases (G) + Net exports (NX) Y = C+ I + G + NX

PRODUCTION METHOD
Total of value added by each firm

EXPENDITURE METHOD
Value of sales in Gosolia Mortors Real GDP : Value of products and services at the current price

INCOME METHOD
Nominal GDP : Value of products and services at a constant price (there will be a base year so calculations are performed based on a constant base price for the period) Real GDP : Value of produced goods and services at each year’s price. Prabudda Missaka s3211475 Page 2

GDP DEFLATOR : THIS IS A MEASURE OF THE PRICE IN THE NOMINAL GDP (USED TO CALCULATE INFATION)

** GDP is a measure of a economic wellbeing

INFLATION RATE

x 100

HOWEVER SOME THINGS ARE NOT INDICATED IN GDP
    The value of leisure The value of a clean environment Value of all activities take place outside the markets Value of time of parents spent helping children

Consumer Price Index (CPI) : Overall cost of the goods and services bought by a typical customer How CPI is calculated; 1. Fix the basket: Determine the most important consumer items 2. Find the price: Find the price of each item at the point of time (This changes along the time) 3. Calculate basket cost: Calculate the prices 4. Chose a base year: determine a base year

How to calculate the inflation rate

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Problems with measuring CPI  Substitution bias (If banana is getting expensive people move on to apples, but this is not recorded in CPI)  Introduction of new goods  Quality of goods not being measured Difference between GDP inflator and CPI GDP inflator Reflects produced domestically CPI Reflects all goods and services bought by customers Compare a FIXED BASKET on DIFFERENT YEARS (current year and base year)

Compare ALL CURRENTLY PRODUCSED GOODS in same year but different prices (Current year and base year)

Adjustment for inflation ( Real value is called “INDEXED FOR INFLATION” ) ( )

INTEREST RATES
Nominal interest rate : rate not corrected for inflation Real interest rate : Rate corrected for inflation

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EX OR CALCULATING REAL INTEREST RATE

• • • • •

You borrowed $1000 for one year. Nominal interest rate was 15 per cent. During the year inflation was 10 per cent. Real interest rate = Nominal interest rate – Inflation 15 per cent − 10 per cent = 5 percent.

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