Chapter 6

Taxes on Production and Imports

A national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs which firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price

Consumption of Fixed Capital

An estimate of the amount of capital worn-out or used up (consumed) in producing the gross domestic product; also called depreciation

Price Index

An index number that shows how the weighted average price of a "market basket" of goods changes over time

Gross Private Domestic Investment (I)

Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories

Net Exports (X)

Exports minus imports

Final Goods

Goods and services that have been purchased for final use and not for resale or further processing or manufacturing

Real GDP

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal

Net Domestic Product (NDP)

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock

Net Private Domestic Investment

Gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year

Gross Domestic Product (GDP)

The total market value of final goods and services produced in a given year.

Multiple Counting

Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once

Nominal GDP

The GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

Explain why an economy's output, in essence, is also its income.

Everything that is produced, is sold. Since buyers pay the same amount of money that sellers receive as income, "an economy's output, is also its income."

Government Purchases (G)

Expenditures by government for goods and services that government consumes in providing public goods and for public (or social) capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services

Intermediate Goods

Products that are purchased for resale or further processing or manufacturing

What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate? Explain.

Gross private domestic investment is depreciation minus net private domestic investment. Net domestic product is calculated by subtracting the GDP by depreciation. Since we are not counting depreciation, net private domestic investment would be appropriate.

In what ways are national income statistics useful?

National Income Statistics are useful in that they allow for economists and policymakers to: - Asses the health of the economy by comparing levels of production at regular intervals - Track the long-run course of the economy to see whether it has grown, been constant, or declined. - Formulate policies that will safeguard and improve the economy's health

Disposable Income (DI)

Personal income less personal taxes; income available for personal consumption expenditures and personal saving

Personal Income (PI)

The earned and unearned income available to resource suppliers and others before the payment of personal taxes

Personal Consumption Expenditures (C)

The expenditures of households for durable and nondurable consumer goods and services

Why do economists include only final goods in measuring GDP for a particular year? Why don't they include the value of the used furniture bought and sold?

The finals goods are only counted in measuring GDP for a particular year because if intermediate goods were counted, overcounting would occur, making the GDP higher than it actually is. The value of used furniture bought and sold is not included into the GDP because the ownership of the items are only changing. The money is not paying for the production of the furniture, but for the change in ownership.

Expenditures Approach

The method that adds all expenditures made for final goods and services to measure the gross domestic product

Income Approach

The method that adds all income generated by the production of final goods and services to measure the gross domestic product

National Income Accounting

The techniques used to measure the overall production of the economy and other related variables for the nation as a whole

Gross Domestic Product GDP

The total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S.- or foreign supplied resources

Value Added

The value of the product sold by a firm less the value of the products (materials) purchased and used by the firm to produce the product

National Income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes