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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