GDP Production & Growth Flashcards

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Real GDP

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Real GDP is the value of economic output adjusted for inflation using base-year prices; it allows comparison of production levels across time by removing price changes.

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Nominal GDP

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Nominal GDP measures the value of goods and services at current prices, so it includes effects of price changes and inflation.

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GDP Deflator

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The GDP deflator is an index that converts nominal GDP into real GDP by accounting for price changes; it reflects overall price level changes in the economy.

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Production Function

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A production function expresses how inputs like capital and labor are transformed into output; a change in technology shifts the function to produce more with the same inputs.

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Labor

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Labor refers to the human effort used in production, including physical and mental work; it is a primary factor of production.

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Capital

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Physical capital comprises tools, machines, and infrastructure used in production; it is a key input in the production process.

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Land

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Land represents natural resources used in production; it is one of the classic factors of production.

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Technology

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Technology represents knowledge and methods that improve productive efficiency; progress shifts the production function upward.

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Entrepreneurship

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Entrepreneurship is the organizing and risk-taking ability that combines the other factors of production to produce goods and services.

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Negative Externality

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A negative externality is a cost imposed on third parties not involved in the market transaction, often not accounted for in market prices.

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Positive Externality

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A positive externality is a benefit to others not directly involved in a market transaction, often leading to underproduction of the beneficial activity.

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Inflation

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Inflation is the rate at which the general price level rises; it affects nominal but not necessarily real GDP.

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Real GDP Growth

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Real GDP growth reflects an increase in the quantity of goods and services produced, after adjusting for price changes.

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GDP Deflator vs CPI

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The GDP deflator measures price changes for all goods in GDP, while CPI tracks the cost of a fixed basket of consumer goods; they often move differently.

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Expenditure Approach

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The expenditure approach sums consumption, investment, government spending, and net exports to compute GDP: C + I + G + NX.

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Net Exports

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Net exports equal exports minus imports; a positive NX contributes positively to GDP via the expenditure approach.

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Imports impact on GDP

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Higher imports reduce net exports and can lower measured GDP if other components do not compensate.

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Factor of Production NOT a currency

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Money is not a factor of production; GDP relies on land, labor, capital, and sometimes entrepreneurship.

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Base Year Prices

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Real GDP uses prices from a base year to hold prices constant and measure true output growth.

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Limitations of GDP

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GDP fails to capture non-market activities, environmental degradation, and income distribution; therefore, it is not a perfect welfare measure.