L1: Macroecnomics, Measuring National Output and income
8 important questions on L1: Macroecnomics, Measuring National Output and income
Market value = What a buyer is willing to pay.
We cannot add together the number of cars, melons, haircuts, and all other goods and services without agreeing on a common way to measure them.
- What is the best practical way to measure?
- The best practical way is to value each good and service in monetary terms: the price that each good or service is sold for.
A final good or service is a good or service purchased by a final user. These are what are used to calculate GDP.
- Why are final goods or services used to calculate GDP?
- If we counted intermediate goods and services as well, hen we would end up double counting.
- How can double-counting also be avoided?
- Double-counting can also be avoided by counting only the value added to a product by each firm in its production process.
Value-added > The difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage.
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There are two main ways to measure the total economic activity in an economy: total production or total income.
When we measure one, we also measured the other.
- Why?
- Because, everything that is produced and sold constitutes income for someone; so we have the choice of measuring the value of products produced and sold or the value of incomes, and each is a valid way of measuring economic activity.
Cash payments made by the government to people who do not supply goods, services, or labour in exchange for these payments.
- How do we define these payments?
- Transfer payments.
Shortcomings of GDP.
GDP can be a useful tool to measure total output in an economy. Many people go further than this, interpreting GDP as a measure of the -being of citizens.
Two important types of production are left out from the measurement of GDP.
- Name the two types:
- Household production.
Household production such as childcare, cleaning, and cooking is not typically paid for with money. However such contributions are real - if they were performed by a non-households-member, they would be paid for and counted in GDP. - The Underground economy.
Buying and selling of goods and services might be concealed from the government to avoid taxes or regulations, or because the goods and services are illegal.
GDP per capita (GDP divided by population) is often used to represent differences in standards of living from country to country. However, even if it accurately measured total production four effects.
- Name the four effects that even when GDP is accurately measured it would still not reflect:
- The value of leisure.
- Pollution and other negative effects of production.
- Crime and other social problems.
- The distribution of income.
- How can you measure price stability?
- GDP deflator = (Nominal GDP : Real GDP) x 100.
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