GROSS DOMESTIC PRODUCT
The most common measure of economic activity is Gross Domestic Product (GDP). The economic growth rate is the rate of change of GDP.
GDP draws together economy-wide data on production (or expenditure or incomes) within the economy.
GDP data helps answer questions such as:
- How much is being produced during a given time period?
- Is it more or less than the previous time period?
Question: Why is difficult value this agricultural machinery?
Answer: Expenditure and output happen at different times as the machinery depreciates. Allowing for depreciatiion changes the measure to Net Domestic Product.
The background picture shows some IKEA furniture. Over the years IKEA furniture has become better value for money as quality rises and some prices fall. This, along with other similar products, distorts the rate of inflation and, therefore, makes index linking GDP a little inaccurate.
Question: How do red apples and green apples impact on GDP calculations?
Answer: If the price of red apples goes up relative to green apples there will be inflation, but consumers are likely to switch to buying more green apples.
Question: What problems are posed by indirect taxation and subsidies?
Answer: GST is levied at 10% of every transaction increasing the final price of products. Pharmaceuticals are subsidised through the Pharmaceutical Beneifits Scheme, so, for example, patients pay $6.50 for 50 chemotheraphy pills produced by Baxter Healthcare in NSW rather than $65.
Question: What is the broken window fallacy?
Answer: We become better off by braking windows. Growth rises when windows are broken and replaced because spending rises, but this is offset by the depreciation caused to buildings.