GDP and Economic growth

 

What is a simple definition of GDP?

GDP or Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. Let’s look at an example- let’s say the GDP of USA is 20.94 trillion USD (2020). Here, it means that in the year 2020, USA produced 20.94 trillion USD worth of finished products and services.

This definition has 4 parts– 

1. Market Value:   It is calculated by multiplying the Price with the Quantity of good/services. (Market value= Price X Quantity). Goods and services are valued at their market price.  

Example: To add oranges, apples, computers and ice-cream we add the market values so we have a total amount of output in currency.  

2. Final goods and services:   Final goods and services are the items, bought by their final consumer. A final good/service contrasts with an intermediate good used as a component of a final good/service. 
 
Let’s look at an example to get a clearer view: Assume that a country only produces cars. A car is made of many parts like tires, dashboard, car seat, engine. These are the intermediate goods and the Car is the Final good.  
 
When calculating GDP, we exclude the intermediate goods/services to avoid double counting.

3. Within a country: We are limited to measuring the market value of Final goods and services only within a Country as the terminology (GDP) suggests- ‘Domestic’.

 4. In a given period of time: There must be a given time period when calculating the GDP. It is calculated both annually and quarterly basis.

The circular flow of expenditure and income

[GDP = expenditure (spending of fund) on final goods = total income]

The circular flow shows the transactions of the Households, Firms, Governments & Rest of the world. We are to link all these 4 actors through 3 separate markets-

1. Factor market: The firms hire factors from the households through the Factor Markets. On the one hand, this is an expenditure for the firm because it has to pay and on the other hand this is an income for the households because it earns. 

2. Goods market: When a household earns they will be consuming. Here, it’s an expenditure for the household and income for the firms. Imagine a household going to the grocery store or a clothing store intending to purchase something. Somewhere, someone had to produce the products you wish to buy and that’s how the goods market helps to get the money from the households to the firms. 

3. Financial market: We can represent the concept of Financial markets in a very simple form as perhaps Banks, pension funds etc. 

Confidence Interval Estimation: One Population

Introduction:

What is the average number of gallons of orange juice sold weekly by a local grocery store?

Management of this grocery store could use an estimate of the average weekly demand for

orange juice (milk, bread, or fresh fruit) to improve the ordering process, reduce waste

(such as spoiled fruit), reduce costs, and in-crease profits.

We present two estimation procedures in this chapter. First, we estimate an unknown

population parameter by a single number called a point estimate. Properties of this point

estimate are considered in Section 7.1. For most practical problems, a point estimate alone is

not adequate. A more complete understanding of the process that generated the population

also requires a measure of variability. Next we discuss a procedure that takes into account this

variation by establishing an interval of values, known as a confidence interval, which is likely

to include the quantity.