Download Real GDP and per head

GROSS DOMESTIC PRODUCT
Gross-total Domestic-home country Product output
The circular flow of income
Households
Products
Factor service
Income
Firms
Consumer expenditure
The methods of calculating GDP
Income method=Output method=Expenditure method
• Income method-all incomes that have been earned in an
economy. Transfer payments are not included.
• Output method-output of all industries in economy. It
includes value added by each firm to avoid double
counting.
• Expenditure method-all expenditure in one economy.
GDP=C+I+G+X-M
+expenditure of one person is income of another
Nominal and real GDP
Real GDP and per head
• Nominal GDP (also
known as money GDP
or GDP at current
prices) represent GDP
that has not been
adjusted for inflation
• Real GDP calculating
GDP at constant prices
by using a price index
• Real GDP shows
change in total amount
of goods and services
produced in one year
• GDP per head (capita)
is total GDP divided
with population.
The difficulty of measuring real
GDP
• GDP figure tends to be underestimated
because of informal economy.
Informal economy
Undeclared ecomomic
activity – shadow, hidden
or grey economy
Non-market goods and
services-housewives,
subsistence agriculture
Causes of economic growth
• Short term cause – rise in aggregate demand
• Long term cause – rise aggregate supply
Consequences of Economic Growth
•
Increase in output means more goods and services that can improve
standard of living.
1.
2.
In rich country - people will have access to more luxury goods
In poor country – access to basic necessities
•
Economic growth means more political power (IMF).
•
Costs: a) if economy works in full capacity, resources can be shifted from
consumer to capital goods. Costs to a living standard in short term but
increase in a long term.
b) deplation of non-renewable resources, environmental damages,
pollution
Sustainable growth-growth that does not endanger the country’s
ability to grow in the future
It is better to have lower but stabile growth than rapid high growth.
Growth rate and National Output
• Example:
In 2009 growth rate is 5%
In 2010 growth rate is 3%
Fall in growth rate but
rise in output
In 2009 growth rate is 5%
In 2010 growth rate is -2%
Fall in growth rate but
also in output