GDP and Key Economic Indicators

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28 Οκτ 2013 (πριν από 3 χρόνια και 9 μήνες)

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GDP and Key Economic Indicators


When you go for a checkup, the doctor looks at several indicators

heart rate, blood pressure, and body
temperature

to help determine your basic level of health. The general economic health of a nation can
also be judged by
looking at several basic economic indicators, which include the Gross Domestic
Product (GDP), the Consumer Price Index (CPI), and the unemployment rate. A quick glance at these
three factors can often tell you how an economy is doing. As stated earlier, th
e GDP is the market value
of all goods and services produced by a country over a specific period of time, usually a year. There are
different methods of measuring GDP, but the most common one is known as the expenditures approach.
This approach adds up all

the money spent by a country’s consumers, firms, and the government, and
then factors in net exports. The formula for GDP can then be written as:


Gross Domestic Product
= Consumer Expenditures + Business Investment + Government
Expenditures + Net Exports


GDP
= C + I + G +
(X
-
N)


The Net Exports part (
X
-
N
) is needed to take into account the amount of money foreigners spend on our
goods and services as well as the amount we spend on foreign goods and services. Foreigners buying our
goods should be part of
GDP, while money we spend on
foreign
goods is not part of the Gross
Domestic
Product.


Net Exports

= (American goods and services bought by foreigners)


(foreign goods and services
bought by Americans)


Net Exports

= exports
-

imports


Tracking GDP over
a period of years can tell you if a nation’s economy is expanding or contracting. If
GDP rises by 4% from Year 1 to Year 2, then the economy appears to be doing well. However, inflation
can distort GDP growth, since a rise in the average price level would
increase GDP. If inflation between
Year 1 and Year 2 was very high, then GDP might not have grown at all. The higher prices caused by
inflation may have caused the 4% shift, but the economy was actually unchanged. For this reason, GDP is
often discussed as

real GDP. A base year is used, and a
price

index
(called the GDP deflator) is used to
measure all future GDP in terms of the base year prices. Ideally, using base year prices will eliminate any
distortions caused by price changes and allow real GDP to acc
urately reflect changes in the nation’s
economy. The GDP deflator is a price index that is designed to track inflation (and deflation). The
Consumer Price Index does the same thing. The CPI takes a hypothetical basket of goods and services
purchased by a t
ypical household. It then tracks changes in the amount of money required to purchase this
same basket of goods and services year after year.









1.

What is measured by the GDP?





2.

If a foreign firm purchases a Caterpillar tractor, does this transaction
affect the US’ GDP? Why or
why not?




3.

If an American company purchases a Mercedes limousine, does this transaction affect the US’
GDP? Why or why not?



4.

Give an example of a “consumer expenditure” you have made in the last 24 hours (examples will
vary):





5.

Based on your knowledge of current events, give an example of an expenditure that the US
Government has made this year (examples will vary):





6.

Give an example of a type of investment that Waffle House might have made in the last year.
What variable

of the GDP formula would be affected by this transaction?





7.

If GDP has grown by 4%, but the rate of inflation was 6%, has the economy actually grown at all?
Why or why not?





8.

What is the “consumer price index” designed to do?








1.

What is measure
d by the GDP?





2.

If a foreign firm purchases a Caterpillar tractor, does this transaction affect the US’ GDP? Why or
why not?




3.

If an American company purchases a Mercedes limousine, does this transaction affect the US’
GDP? Why or why not?



4.

Give an e
xample of a “consumer expenditure” you have made in the last 24 hours (examples will
vary):





5.

Based on your knowledge of current events, give an example of an expenditure that the US
Government has made this year (examples will vary):





6.

Give an example

of a type of investment that Waffle House might have made in the last year.
What variable of the GDP formula would be affected by this transaction?





7.

If GDP has grown by 4%, but the rate of inflation was 6%, has the economy actually grown at all?
Why
or why not?





8.

What is the “consumer price index” designed to do?







GDP and Key Economic Indicators


When you go for a checkup, the doctor looks at several indicators

heart rate, blood pressure, and body
temperature

to help determine your basic leve
l of health. The general economic health of a nation can
also be judged by looking at several basic economic indicators, which include the Gross Domestic
Product (GDP), the Consumer Price Index (CPI), and the unemployment rate. A quick glance at these
thre
e factors can often tell you how an economy is doing. As stated earlier, the GDP is the market value
of all goods and services produced by a country over a specific period of time, usually a year. There are
different methods of measuring GDP, but the most
common one is known as the expenditures approach.
This approach adds up all the money spent by a country’s consumers, firms, and the government, and
then factors in net exports. The formula for GDP can then be written as:


Gross Domestic Product
= Consumer

Expenditures + Business Investment + Government
Expenditures + Net Exports


GDP
= C + I + G + (X
-
N)


The Net Exports part (X
-
N) is needed to take into account the amount of money foreigners spend on our
goods and services as well as the amount we spend on

foreign goods and services. Foreigners buying our
goods should be part of GDP, while money we spend on
foreign
goods is not part of the Gross
Domestic
Product.


Net Exports

= (American goods and services bought by foreigners)


(foreign goods and service
s
bought by Americans)


Net Exports

= exports
-

imports


Tracking GDP over a period of years can tell you if a nation’s economy is expanding or contracting. If
GDP rises by 4% from Year 1 to Year 2, then the economy appears to be doing well. However, infla
tion
can distort GDP growth, since a rise in the average price level would increase GDP. If inflation between
Year 1 and Year 2 was very high, then GDP might not have grown at all. The higher prices caused by
inflation may have caused the 4% shift, but the

economy was actually unchanged. For this reason, GDP is
often discussed as real GDP. A base year is used, and a
price

index
(called the GDP deflator) is used to
measure all future GDP in terms of the base year prices. Ideally, using base year prices will
eliminate any
distortions caused by price changes and allow real GDP to accurately reflect changes in the nation’s
economy. The GDP deflator is a price index that is designed to track inflation (and deflation). The
Consumer Price Index does the same thing.

The CPI takes a hypothetical basket of goods and services
purchased by a typical household. It then tracks changes in the amount of money required to purchase this
same basket of goods and services year after year.