World map showing inflation rates

Measuring Economic Activity

 

 

GDP

 

GDP: The total market value of goods and services produced within a nation in a given year.

                            GDP: C+I+G+X

 

C: Consumption

I: Investment

G: government purchase of goods and services

X: net exports produced within a nation in a given year.

 

GDP is used primarily to measure the overall performance of the economy.

 

We measure GDP in two ways: FLOW-OF-PRODUCT APPROACH:

 

GDP equals the sum of the annual flow of final goods and services.

 

COST APPROACH:

 

GDP equals the total factors of earnings that are the costs of producing final products.

 

The Problem of Double Counting: One risks committing the problem of double counting when he counts the final goods produced and the intermediate goods that we used in order to produce those final goods.  Example: cakes and milk. Cars and steel. Flour and bread…etc.

 

Intermediate good: goods that are used up to produce other goods.

 

Value added: is the difference between a firms sale and its purchases of materials and services from other firms.

 

Details of National Accounts

 

Nominal GDP: represents the total money value of total goods and services produced within a given nation in a given year by using changing prices.

 

Real GDP: Corrects Nominal GDP in a way that it represents the total money value of total goods and services produced by the economy in a given year, but without using changing prices, that is Real GDP represents the total output after price changes are removed.

 

GDP DEFLATOR: is the difference between the growth in Nominal GDP and the growth in Real GDP.

 

Real GDP= Nominal GDP/ GDP price index= Q= PQ/P.

 

Consumption is the first important part of GDP, it represents the largest sector of GDP; consumption is divided into three sectors, nondurable goods, durable goods, and services.

 

Services is the most rapidly growing sector.

 

Investment: THE PRODUCTION OF CAPITAL GOODS.

 

Government: when we represent the contribution of the government in the GDP, we have to exclude transfer payments, because they do not offer a return for a service. That is, we have to consider only governments purchases of goods and services.

 

GOVERNMENT PURCHASES 2 TYPES OF GOODS: CONSUMPTION-TYPE GOODS, and INVESTMENT TYPE GOODS.

 

NET EXPORTS: the difference between exports and imports of goods and services.

 

NDP=National Domestic Product= GDP — depreciation.

 

PRICE INDEXES AND INFLATION:

 

Price Index: is a measure of the average level of prices.

Inflation: denotes a rise in the general level of prices.

Rate of Inflation: is the rate of change in the general price level.

 

Measurement of the rate of inflation: Rate of inflation of year T:

 

((Price level of year T – Price level of year T – 1)/ (price level of year T – 1))*100.

 

CPI, Consumer price index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

 

GDP Price Index is the price of all goods and services produced in the country rather than of a single component.