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Approach to GDP
Expenditure Approach:
GDP = expenditure (cost) on goods &
services produced in the country within
a specific period.
Los 17.b
Income Approach:
GDP = income earned by households
& businesses in the country during a
period.
Expenditure Approach
Sum-of-value added:
GDP = value created at each stage of
production & distribution during a
period.
Los 17.c
Value-of-final output:
GDP = value of final goods & services
produced during the period.
GDP
Nominal GDP:
GDP =
Measure goods & services at their
current cost.
Real GDP:
=
Measure current year output using
base prices.
Los 17.d
Components of GDP
Consumption (C)
Investment (I)
Income
National Income:
NI = Income received by
factors of production used in
the production of final output.
Personal Income:
PI = Pre-tax income received by
households.
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Los 17.f
IS curve:
(S-I) = (G-T) + (X-M)
It shows the ve relationship at each level of real interest rate b/w
real interest rate and levels of aggregate income.
LM Curve:
According to quantity theory of money:
MV = PY
where,
M = Nominal money supply
V = Velocity of money
P = Price level
Y = Real income/expenditure
M/P = Y (1/V)
It shows the +ve relationship between real interest rate & level of
real income, for a given level of real Ms, at which real MD= real Ms.
Los 17.g
Shift in AD curve:
In household wealth.
In consumer & business expectations.
Capacity utilization.
Fiscal & Monetary policy.
Currency exchange rate.
Global economic growth rates.
Los 17.i
Shifts in AS curve:
Short-Run:
In nominal wages or other input prices.
Expectations about future prices.
Business taxes & subsidies.
Currency exchange rates.
Factors affecting LRAS.
Long-Run:
In labor supply & quality of labor.
In physical capital supply.
Availability of natural resources.
Level of technology.
Gaps
Stagflation:
High unemployment and increasing inflation. (Or) weak economic growth +
high inflation (may be caused by sudden in short-run AS).
Fixed income investments.
Investment in equities.
Investment in commodities.
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Labor Supply
Human Capital
Technology
Natural Resources
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Los 17.k
Production function:
It shows the relationship between:
Output & labor,
Capital stock.
Productivity
Total factor productivity advances in
technology.
Los 17.L