Ch 4-1.pptx

Chapter 4: Measuring GDP and Economic Growth Objectives: Define GDP and use circular flow model to explain how GDP can be measured from income or expenditure side. Measurement of GDP and its major components. GDP as a measure of economic growth. Limitations of GDP as a measure of economic growth or the standard of living. Definition of GDP GDP (Gross Domestic Product) is the market value of all final goods and services produced in a country in a given time period. Market value goods & services are valued at their market prices. GDP rises if prices rise (more on this later) Final goods and services Bought by final user Intermediate goods are produced by one firm, bought by another, and used as a component of a final good or service. Exlude intermediate goods to avoid double counting. Produced within a country Any domestic production, regardless of who owns the resources In a given time period Production during a specific year (sales of used items excluded, except value of service in sale) Inventory adjustments account for goods produced in one year but sold in another if inventories rise by $10 million during 2010, $10 million is added to sales of final goods & services since it reflects goods produced but not sold during 2010. If inventories fall by $10 million during 2010, $10 million is subtracted from sales of final goods & services because $10 million was sold during 2010 that was produced prior to 2010. Definition of GDP