chapter 7

How is GDP calculated under the income approach?

-count income derived from production -wages + rents+ interest + profits

DPI

-disposal income -consumption of savings -amount of income that households have left over after paying their personal taxes

What does the U.S. underground economy comprise?

-gamblers, drug dealers, hookers, unreported tips, unreported sales recipients, cash only jobs, exchanged goods and services

Government purchaes (G)

-includes expenditures for goods and services that the government uses to provide public services (schools and roads) -exlcudes gov't transfer payements (social security)

NI

-national income -NDP+ net foreign income

NDP

-net domestic product -GDP-consumption of fixed capital aka depreciation

Shrotcomings of GDP

-non market activities -leisure -improved product quality -underground economy -environmental and noneconomic

PI

-personal income -all income received whether earned or not earned

How large is the underground economy?

8% of recorded GDP in USA 7.2% globally

GDP calculated under expenditures approach

Consumption by households + investment by businesses + gov't purchases + expenditures by foreigners

How are intermediate goods accounted for in calculating GDP?

GDP includes only the market value of final goods and ignores intermediate goods, which are goods either purchased for resale or for further processing into final goods.

What happens to the value of a dollar over time in relation to GDP?

GDP only measures production at current dollar values but is a problem bc the value of a dollar changes over time

Alternative method to use to calculate a price index

Gather separate data on physical outputs and their prices, from this info you can determine the market value of outputs in successive years if the base year price prevails. Once determining the real GDP through the info, you can identify the price index for a given year by diving nominal GDP/real GDP

Net exports

Xn=exports(X)-imports(M)

gross private domestic investment (Ig)

all final purchases of machinery, equipment and tools by businesses; ways business invest in themselves -GDP = C + Ig + G + Xn

What does NI measure?

all income earned through the use of American owned resources at home or abroad -includes taxes on production and imports

Nominal GDP

based on prices that were in effect when the output was produced

real GDP

changes in price level

personal consumption expenditures

expenditures by households on goods/services during a year

Improved product quality

fails to capture full value of improvements in product quality

nondurable goods

food,clothing, gasoline

Net private investment

gross investment- deprecation

durable good

having a life of 3 or more years

Underground economy

illegal/legal activities that produce income that is not measured traditionally

what does NDP measure

measures the total annual output that entire economy can consume without impairing its capacity to produce in ensuing years

value added approach

measuring the additional value that is created in every stage of production

GDP

monetary value of all final goods/services produced in an economy during a given time period

How does price index help convert nominal GDP into real GDP?

nominal GDP/price index=real GDP

What does GDP exclude?

nonproduction transaction because they have nothing to do with the generation of final goods. They can be purely financial transitions and second-hand sees

How is GDP by the expenditure approach related to GDP by the income approach?

on the expenditures side of GDP all final goods produced by the economy are bought either by three domestic sectors/foreign buyers. On the income side the total receipts acquired from the sale of that total output are allocated to the suppliers of resources as wage/rent/interest/profit

Transfer payment

payment of money by gov't to a household for which the payer receives no good/service in return

What are the GDP split into by the gov't?

personal consumption expenditures (C) and gross private domestic investment (Ig)

How is price index calculated?

price of market basket in specific year/price of same market basket in base year * 100

Non market actitivities

productive activities occur outside any market that are not measured in tradiitonal way

Purely financial transactions

public transfer payements (ss and welfare) , private transfer payments (gifts), and stock market transactions

Environmental and nonecomonic

sources of well-being that are problematic bc GDP does not have way to accurately value and report the issues

GDP under income approach

wages + rents + interests + profit + statistical adjustments

Leisure

weekends/holidays that add value and satisfaction to workers

How does the size of U.S. real GDP compare with other countries GDP?

U.S. is better off;GDP does not measure well being