ECON 2120-Ch.6 Review

...of all finished...

Goods must be finished goods and services

Government purchases

Spending by all levels of government on finished goods and services. Transfers are not included in government purchases

Net exports

The value of exports minus the value of imports

...within a country...

U.S. GDP is the market value of finished goods and services produced by labor and capital located in the United States, regardless of the nationality of the workers

National spending approach/expenditure approach formula

Y = C+I+G+NX, where Y=nominal GDP, C=the market value of consumption goods and services, I=the market value of investment goods (capital goods), G=the market value of government purchases, NX=net exports (market value of exports - market value of imports)

Factor income approach formula

Y=Employee compensation+Rent+Interest+Profit

GDP deflator

A price index that can be used to measure inflation

Recession

A significant, wide-spread decline in real GDP and employment

Real variable

A variable that corrects for inflation, namely, a general increase in prices over time

Real GDP growth per capita

Best reflection of changing living standards.

GDP does not count bads: environmental costs

GDP adds up the market value of finished goods and services, but it does not subtract the value of bads. (ex. pollution)

Nominal GDP

GDP calculated using prices at the time of sale (GDP is 2016 is calculated using 2016 prices)

Real GDP

GDP calculated using the same prices for in all years (has been adjusted for changes in prices using the same set of prices in all time periods)

GDP does not count the health of nations

GDP countrs the production of goods and services, but the more goods and services we can afford, the more important is another source of wealth, health, and longevity (ex. U.S. life expectancy increased by 1 year, which is valued at $150,000)

GDP per capita

GDP divided by a country's population

Problems with GDP as a measure of output and welfare

GDP does not count the underground economy, GDP does not count non priced production, GDP does not count bads: environmental costs, GDP does not count the health of nations, GDP does not measure the distribution of income

...produced...

GDP is meant to measure production so sales of goods are not included in GDP (ex. the sale of a used car or purchase of stocks are NOT counted in GDP)

Growth rate percentage change formula

GDP new - GDP old/GDP old x 100

GDP does not measure the distribution of wealth

GDP per capita is a rough measure of the standard of living in a country. But if GDP per capita grows by 10%, this does not necessarily mean that everyone's income grows by 10% (ex. majority of GDP could be contained in 2 people and the rest of country's citizens are poor)

...in a year.

GDP tells us how much the nation produced in a year, not how much wealth the nation has accumulated in its entire history

Finished goods and services

Goods and services that are sold to final users and then consumed or held in personal inventories (ex. car)

Intermediate goods and services

Goods and services that are sold to firms and then bundled or processed with other goods or services for sale at a later stage and are NOT counted in GDP (ex. computer chip)

Capital goods and services

Goods and services used to produce other goods as part of GDP (ex. tractor)

Real GDP growth

If pressed to choose a single indicator of current economic performance, most economists would probably choose real GDP growth

GDP does not count the underground economy

Illegal or underground market transfers are omitted from GDP (ex. drug sales)

GDP is the market value...

Means that a good or service must have a price (Use market value to determine how much each good or service is worth and then sums the total)

Gross national product (GNP)

Measures what is produced by the labor and property supplied by a country's residents wherever in the world that labor and capital is located, rather that what is produced within the country's border

2 ways to calculate GDP

National spending approach/expenditure approach (sum of spending) and the factor income approach (sum of receiving)

GDP deflator formula

Nominal GDP/Real GDP x 100

GDP does not count non-priced production

Non-priced production occurs when valuable goods and services are produced but no explicit monetary payment is made (ex. watching a free video on youtube or mowing your neighbor's yard for free)

Consumption

Private spending on finished goods and services

Investment

Private spending on tools, plants, and equipment used to produce future output

Gross domestic product (GDP)

The market value of all finished goods and services produced in a country within a year

...goods and services...

The output of an economy includes both goods and services. Services provide a benefit to individuals without the production of tangible output.

Business fluctuations/Business cycles

The short-run movements in real GDP around its long-term trend