ECON Ch 7

Durable Goods

A consumer good with an expected life (use) of three or more years

Taxes on Production and Imports

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

Service

An (intangible) act or use for which a consumer, firm, or government is willing to pay

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 relative to its price in a specific base year

Undistributed Corporate Profits

Any after-tax profits that are not distributed to shareholders are saved, or retained, by corporations to be invested later in new plants and equipment. Undistributed corporate profits are also retained earnings

Improved Product Quality

Because GDP is a quantitative measure rather than a qualitative measure, it fails to capture the full value of improvements in product quality. A $200 cell phone purchased today is of very different quality than a cell phone that cost $200 just a decade ago.

Compensation of Employees

By far the largest share of national income—$9,655 billion in 2015—was paid as wages and salaries by business and government to their employees. That figure also includes wage and salary supplements, in particular, payments by employers into social insurance and into a variety of private pension, health, and welfare funds for workers.

GDP

C + Ig + G + X

GDP (Domestically Produced)

C + Ig + G + X - M

Nonmarket Activities

Certain productive activities do not take place in any market, like leisure, etc

Interest

Consists of the money paid by private businesses to the suppliers of loans used to purchase capital. It also includes such items as the interest households receive on savings deposits, certificates of deposit (CDs), and corporate bonds.

Government Purchases (G)

Expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services

Gross Private Domestic Investment

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

Nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation

Gross Domestic Product

GDP; the total market value of all final goods and final services produced annually within the boundaries of a nation

Final Goods

Goods that have been purchased for final use (rather than for resale or further processing or manufacturing)

Net Domestic Product

Gross domestic product minus 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 addition to the capital stock

Net Private Domestic Investment

Gross private investment (-) consumption of fixed capital; the addition to the nation's stock of capital during a year

Problems with Using Money or Nominal Values

How can we compare the market values of GDP from year to year if the value of money itself changes in response to inflation or deflation

Net Foreign Factor Income

Income Americans gain from supplying resources abroad and add in the income that foreigners gain by supplying resources in the United States

Accounting for this Difference

NIPA accountants add a statistical discrepancy to national income. The addition of that number equalizes the GDP totals produced by the two methods

Corporate Profits

National income accountants subdivide corporate profits into three categories: Corporate income taxes These taxes are levied on corporations' profits. They flow to the government. Dividends These are the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households—the ultimate owners of all corporations. Undistributed corporate profits Any after-tax profits that are not distributed to shareholders are saved, or retained, by corporations to be invested later in new plants and equipment. Undistributed corporate profits are also called retained earnings.

Disposable Income (Di)

Personal income minus less personal taxes; income available for personal consumption expenditures and personal saving C + S

Intermediate Goods

Products that are purchased for resale or further processing or manufacturing

Rents

Rents consist of the income received by the households and businesses that supply property resources. They include the monthly payments tenants make to landlords and the lease payments corporations pay for the use of office space.

The Underground Economy

Some of the people who conduct business there are gamblers, smugglers, prostitutes, "fences" of stolen goods, drug growers, and drug dealers. They have good reason to conceal their incomes. Most participants in the underground economy, however, engage in perfectly legal activities but choose illegally not to report their full incomes to the Internal Revenue Service (IRS)

Private Transfer Payments

Such payments include, for example, the money that parents give children or the cash gifts given during the holidays. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP.

Stock Market Transactions

The buying and selling of stocks (and bonds) is just a matter of swapping bits of paper. Stock market transactions create nothing in the way of current production and are not included in GDP. Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economy's current output of goods and services.

Composition and Distribution of Output

The composition of output is undoubtedly important for well-being. But GDP does not tell us whether the currently produced mix of goods and services is enriching or potentially detrimental to society. GDP assigns equal weight to an assault rifle and a set of encyclopedias, as long as both sell for the same price. Moreover, GDP reveals nothing about the way output is distributed. Does 90 percent of the output go to 10 percent of the households, for example, or is the output more evenly distributed? The distribution of output may make a big difference for society's overall well-being.

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 both durable and nondurable consumer goods

Expenditures Approach

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

Income Approach

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

GDP and the Environment

The social costs of the negative by-products reduce our economic well-being. And since those costs are not deducted from total output, GDP overstates our national well-being.

National Income Accounting

The techniques used to measure the overall production of a country's economy as well as other related variables

Value Added

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

Base Year

The year with which other years are compared when an index is constructed; for example, the base year for a price index is 100

Dividends

These are the part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They thus flow to households- the ultimate owners of all corporations

Public Transfer Payments

These are the social security payments, welfare payments, and veterans' payments that the government makes directly to households. Since the recipients contribute nothing to current production in return, to include such payments in GDP would be to overstate the year's output.

Corporate Income Taxes

These taxes are levied on corporations' profits. They flow to the government

Leisure

This increase in leisure time has clearly had a positive effect on overall well-being. But our system of national income accounting understates well-being by ignoring leisure's value

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

Net Exports (X)

Value of exports, since exports are by definition goods and services Export - Minus

Proprietor's Income

What we have loosely termed "profits" is broken down by the national income accountants into two accounts: proprietors' income, which consists of the net income of sole proprietorships, partnerships, and other unincorporated businesses; and corporate profits. Proprietors' income flows to the proprietors.

Multiple Counting

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

Nondurable Goods

a consumer good with an expected life (use) of less than three years

Gross Investment

doesn't have to exceed depreciation; however, when gross investment and depreciation are equal, net investment is zero and there is no change in the size of the capital stock. When gross investment is less than depreciation, net investment is negative. The economy then is disinvesting- using up more capital than it is producing- and the nation's stock of capital shrinks.

Aggregate Output

primary measure of economy's performance is its annual total output of goods and services

real GDP

real gross domestic product

Income Approach to GDP

sums compensation to employees, rent, interest, proprietor's income, corporate profits, and taxes on production and imports to obtain national income and then subtracts net foreign factor income and adds consumption of fixed capital and a statistical discrepancy to obtain GDP

Financial Investments

transfer of claims to existing capital goods does not produce new capital goods. Therefore such transactions are not included as investment in the GDP

GDP Price Index

used in US is called the chain type annual weights price index