ECON1020 Lecture Notes - Lecture 3: Human Development Index, Gross National Income, Gdp Deflator
Lecture 3 - Size Matters
Thursday, 8 March 2018
1:58 PM
<<ECON1020 Lecture 3.pdf>>
• Size of economy is measured in GDP in terms of Purchasing Power Parity (PPP)
• GDP is a measure of the total amount of goods and services produced in an economy over
a certain period of time
• Units of goods and services are all converted into money and add them together
• Only includes the market value of final goods and services
o A final good or service is the end product of a production process
o Intermediate goods or services are input into another good or service
• Methods of computing GDP
o Production Method
• The sum of the value of all goods and services produced in the economy minus
the costs to produce the goods, leaves the value added
o Expenditure Method
• Exports minus imports, sum of total expenditure and net exports
o Income Method
• The sum of incomes generated from the production of goods or services
• All these methods will have equal results in theory, but don't in reality
• Components of GDP according to the ABS
o Consumption: Spending by households on goods and services
o Investment (I): Spending by firms on new factories, office space etc. and spending on
new houses by households
o Government purchases (G): Spending by federal, state and local governments on
goods and services
o Net exports (NX): The value of exports minus the value of imports
o GDP = C + I + G + NX
• GDP does a good job at measuring total production, but is not flawless
• Sometimes used as a measure of wellbeing, but it is not a very good measure of wellbeing
• Shortcomings of GDP
o Household production: goods and services people produce for themselves
o The underground economy: buying and selling of goods and services that is
concealed from the government (dodgy dealings)
o Distribution of GDP is not captured, i.e. inequality and income
o The value of leisure is not included
o The level, quality of, and access to health care and education is not measured
o GDP in not adjusted for pollution or other negative effects of production
o GDP is not adjusted for changes in crime and other social problems
• Nominal GDP
o The market value of final goods and services evaluated at current year prices
• Real GDP
o A measure of the final goods and services, holding prices constant
• Nominal GDP can change over time due to changes in price and/or output
• Real GDP shows changes in output only
• The ABS uses chain volume measures to estimate real GDP, this is to minimise distortion
from changes in relative prices
• GDP also allows us to calculate changes in the price level over time
• Price level: a measure of average price of goods and services in the economy
• GDP deflator: a particular measure of the price level, calculated by dividing nominal GDP
by real GDP and multiplying by 100
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