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GDP - Gross Domestic Product

Total Market value of all final goods gathered within 1 year.

(but it could be 1 month, 6 months, …)

all

Market value

$

Rising GDP means strong & prosperous economy

Falling GDP means weak & unstable economy

GDP Formula(Expenditure Approach)

GDP = C + G + I + X - M

C - Consumption - Consumer goods & Services

G - Government Spending - Schools, healthcare, social workers

I - Investments - Capital gain for businesses

Foreign Trade: X - Exports M - Imports

So GDP takes into account:

Double Counting

GDP does not include the cost of raw materials used in the final product.

$

$

$

$

Only the final product’s cost is counted

GDP Does not Include:

  1. Raw materials used to make final product

  2. Second hands goods & services

  3. Stocks & Bonds

GDP Does Include:

Every produced domestically that is legal

  1. Transfer Payments

Welfare

  1. Oversea profits

  2. Non Market Services

  3. Illegal shit

Domestic goods traded

Foreign goods bought

Real GDP 

       Nominal GDP is not good.

Real GDP is Nominal GDP with inflation removed.

Real GDP =

Nominal GDP

GDP Deflator

  • 100

Every other formula can be derived from this one

GDP per capita

GDP per person in country

Per Capita GDP =

GDP

Population

  • 100

Real GDP Rate =

ΔReal GDP

ΔYears

  • 100

The Multiplier Effect

Money injected into the economy boosts GDP exponentially

Marginal Propensity to Consume =

ΔConsumption

ΔIncome

Just your percentage of income being spent

Marginal Propensity to Withdraw =

ΔWithdrawals

ΔIncome

Just your percentage of income being saved

Withdrawals + Consumption = Income

Multiplier =

MPC + MPW = 1

1

MPW

If everyone spent with the same MPC ratio, A certain spent amount can be exhausted within some rounds. Rounds cannot be counted, but GDP increase can

GDP =

final

GDP * Multiplier

init

=

GDP Limitations:

  1. Disregards population size

  2. Disregards non-profit work

  3. Allows for under the table transactions

  4. Includes inflation

  5. Disregards types of goods, i.e cigarettes & guns

  6. Does not care about leisure time

  7. Degrades environment

  8. Disparity in income

  9. Does not measure product quality

The Business Cycle 

   Changes in Real GDP

Measured per quarter (3 months)

Expansion

Peak

Recession

Trough

Expansion: Good times. Cheaper prices, rising wages

Recession: Bad times. Higher prices, higher unemployment

Peak: Best of best times

Trough: Worst of worst times

The Circular Flow Of Income

Real GDP

Time

Most of the economy is based off consumer-business interactions On occasion, money may enter this loop in the form of injections Certain cases, money may leave this relationship in the form of leakages

Households

Businesses

Goods

Services

Labour

Entrepreneurs

Leakages

Injections

  • Govt spending

  • Investment

  • Exports

  • Taxes

  • Savings

  • Imports

Leading Indicators

Events that foretell changes in the Real GDP

Spending confidence signals a GDP rise

Wary purchasing signals a GDP decline

GPI - Genuine Progress Indicator

GDP only counts positives. It never counts negatives.

As a planning tool, the GPI succeeds in giving a more holistic scale

GDI: + good community + good marriage - crime - pollution - commuting

GDI Downsides

  1. Follows a biased world view
  2. Too much work
  3. You can just see GDP first derivative
  4. No win situtations. For example wetlands. Removing wetlands = pollution keeping wetlands = malaria

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