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Copy of GDP
Transcript of Copy of GDP
The problem about GDP
Does GDP affect the standard of living?
The Problem About GDP
it does not value environmental degradation or any environmental issues of producing products
GDP is not a completely accurate measure of economic activity
There are a few drawbacks as to why GDP is inaccurate
Doesn't account for non-market production
(i.e. black market, shadow economy, underground economy) or statistical discrepancies such as illegal trading and human measurement errors
Types of Goods
GDP does not know the types of goods produced.
Does GDP Affect Standard of Living?
GDP is an economic tool for measuring economic activity
Doesn't measure standard of living accurately
If real GDP goes up, there is more economic activity. If people in the country have more money to spend they're more well off
Effect of inflation: there is a surplus of money in the economy that leads to a situation in which money will lose its value
Demand for Products: leads to scarcity where the GDP level may rise to an unsustainable level and a depression will likely occur after
Rising Levels: if it is not monitored, it could lead to a period of recession where both GDP and standard of living fall
Impact on Citizens
If the GDP growth rate increases rapidly, it may force the Bank to raise interest rates to lower inflation
Loans are affected by interest rates; lenders are aware that inflation will depreciate the value of their money, so citizens will be charged more as increased rates are to offset for the potential loss.
However, if GDP declines, business revenues decrease as well. This directly affects layoffs and increases unemployment. If GDP descends for more than 2 quarters consecutively, a recession will occur.
What is GDP?
Gross Domestic Product: is the market value of all final goods and services produced within a country in a given period of time
Focusing on expenditure approach, which calculates total spending in the economy, income approach also exists, which calculates all incomes in an economy
Equation for expenditure approach: GDP=C+I+G+(X-M)
Most common method in calculating GDP
C= Personal Consumption (household expenditures)
I= Gross Investment (sum of all the country's businesses spending on capital)
G= Government Spending (sum of government's spending on goods and services)
X-M= Net Exports (accounts for purchase of Canadian goods and services by the rest of the world and from the rest of the world)
GDP is inaccurate
Other Factors Excluded
Leisure and Vacations
Monetary Policy: actions conducted by the Bank in adjusting short term interest rates with maintaining a low and relatively stable rate of inflation
The main objective is to sustain a well-functioning economy and overall well-being of citizens
High inflation is damaging to the economy and costly to firms and individuals
While lowering interest rates, expenditures on investment and interest-sensitive consumption goods increase, hence causing real GDP to rise
Yes, to an extent GDP affects the Standard of Living
"The level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area." - Investopedia
What is the standard of living?
What Factors Contribute to
the Standard of Living
Missing population factor, no average for GDP
Per Capita GDP is a better way of measuring standard of living
Per Capita GDP is calculated per person (Nominal GDP divided by population)
The gap between the rich and poor unseen
Monetary policy contributes to a productive and growing economy by providing low, stable and predictable inflation that allows citizens to make confident decisions with investments and spending
Nominal GDP: is expressed in current dollars, not adjusted for inflation
Real GDP: takes inflation into account to provide a more accurate value for GDP (using base year costs)
Real & Nominal GDP
In relations to the Monetary Policy
Lower interest rates encourages business.
Encourages longer-term investment in the economy and contributes to job creation and increased productivity
Also leads to improvements in the standard of living
More economic activity = higher GDP
As employment increases, people have greater disposable incomes allowing more spending that results in greater GDP
Connection Between GDP & Standard of Living
Exclusions of GDP
Financial Exchanges - transition of purchasing power from one party to another
i.e. Bank deposits, purchasing stocks
Second Hand Purchases - buying used goods aren't included, since they were already accounted for during its first sale
i.e. Selling a used computer to a friend
products are now more advanced due to technology and innovation
GDP doesn't capture the improvements in quality; only adds up selling prices
GDP doesn't reflect on how output is distributed among its population
i.e. standards of living may be misinterpreted due to varied income distribution
What do you remember?
1. What is not included in calculating GDP?
2. Name 4 reasons why GDP is inaccurate
3. Why is GDP not an excellent indicator of standard of living?
Thank You !