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Measuring the Economy's Performance: GDP
After reading Chapter 8, you should be able to:
The Circular Flow of Income and Output:
- To do the following:
a) define what is meant by National Income Accounting,
b) reproduce the circular flow of income and output correctly labeling
all actors, markets, and flows, and
c) explain why profits are a cost of production.
- To do the following:
a) discuss what is exchanged in the product markets and in the factor
markets, and
b) explain why dollar value of all output must equal total income.
GDP defined:
- To do the following:
a) give the definition of GDP,
b) explain why it is a flow concept and not a stock concept,
c) identify two main methods of measuring it, and
d) explain why intermediate goods are not included in the definition
using the idea of value added.
- List all other transactions that are not included in GDP and explain
why they are not included.
Limitations of GDP:
- Explain some of the limitations of GDP and why GDP is often not an
accurate measure of national well-being.
Calculating GDP by the expenditure approach:
- To do the following:
a) list the components that comprise the expenditure approach to measuring
GDP, and
b) explain what is contained in each component.
- Explain how depreciation (capital consumption allowance) connects
GDP to NDP and gross private domestic investment to net investment.
Calculating GDP by the income approach:
- To do the following:
a) list the components that comprise the income approach to measuring
GDP,
b) explain what is contained in each component,
c) be able to list the other three measures of national income besides
GDP and NDP, and
d) show how all five are related to one another.
Nominal GDP vs. Real GDP:
- To do the following:
a) distinguish between nominal GDP and real GDP,
b) explain why the distinction matters, and
c) be able to correct nominal GDP for changes in the price index (the
GDP deflator).
Comparing GDP per capita of different countries:
- To do the following:
a) discuss why using purchasing power parity when converting one country’s
GDP into the currency value of another county is preferred to using
the current exchange rate, and
b) be able to describe the per capita GDP of the U.S. as it compares
to other countries using both approaches.
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