Macro - Chapter 6
Equation for GDP using the expenditure approach
GDP = C + I + G + Ex - Im (CIGEI) personal consumption + gross private domestic investment + government consumption and gross investment + exports - imports
Real GDP
GDP adjusted for price changes/inflation
Nominal GDP
GDP measured in current dollars
Difference between GDP and GNP
GDP: produced in country by anyone GNP: produced by country citizens anywhere
Net National Product
GNP - depreciation
GDP and GNP equation
GNP = GDP + receipts of factor of income from world - payments of factor of income to the world
Net Investment
Gross Investment (I) - Depreciation - measure of how much the stock changes
GNP
Gross National Product total market value of all goods/services produced by a country's CITIZENS or country owned factors of productions (i.e. a factory or plant), regardless of where the output is actually produced
Government Spending (G)
Includes all government consumption and investment on finals goods/services
GNP and Net National Product equation
NNP = GNP - Depreciation
Is national income = GDP?
NO! need to subtract/add some stuff (see equation)
NNP and National Income equation
National Income = NNP - statistical discrepency
Are the purchase of stocks, bonds, and mutual funds part of gross private domestic investment?
No!
Is residential investment a main category of consumer expenditure?
No! It's gross private domestic investment
Equation for Disposable Income
Personal Income - Personal Taxes
What counts as private investment in GDP?
Unsold cars that were made that year
Are unsold products counted towards GDP?
Yes! They have still been produced. They go towards "private investment"
How to calculate inflation using GDP deflators
(new deflator-old deflator)/old * 100
Main categories of consumer expenditure
- Services - Durable goods - Nondurable goods
Mexican firm in the US is manufacturing something. Whose GNP and/or GDP are the products a part of?
- U.S. GDP - Mexican GNP
What 8 categories are included in national income?
- employee compensation - proprietor's income - rental income - corporate profits - net interest - indirect taxes minus subsidies - net business transfer payments - surplus of government enterprises
Problems with fixed-weight system
- ignores structural changes to economy - ignores possibility of economy just responding to supply shifts, and therefore decreasing demand/changing prices
Gross National Income (GNI)
- new method by World Bank to compare GDPs in common currency without worrying about instability of exchange rates - uses average of several years' exchange rates, adjusted for inflation, to convert everything to dollars
Three Categories of Personal Spending
- personal consumption - personal interest payments - transfer payments made by households
Things GDP doesn't count
- pollution - reduction in crime - happiness - leisure time - housework (which, if serviced out, would count) - income distribution
Categories of gross private domestic investment
- residential investments - nonresidential investments - changes in business inventories
Examples of things that don't count towards a year's GDP
- things produced in previous years but sold that year - bonds sold by federal government - loans you take out - anything produced by a U.S. firm overseas - reselling of a house - sale of stocks -- BUT paying a broker to help you resell it DOES count
Which of the following would be counted in 2016's GDP? A. the value of a bond sold by the federal government B. the bonus check a stockbroker gets from his/her company in 2016 C. the value of a TV that was produced in 2015 but not sold until 2016 D. the value of a loan you take in 2016
B! The bonus check a stockbroker gets from his/her company in 2016 counts towards GDP.
Japanese plant in U.S. with mostly American workers -- how does this apply to GNP and GDP?
all of its output = U.S. GDP only, but not all goes towards GNP... wages of American workers = U.S. GNP profits of the company = Japanese GNP
Value Added
alternative way to calculate GDP: instead of just looking at the final products/services, add up the added value at every step of the production process
Personal Saving
amount of disposable personal income left after all spending
Nondurable Goods
don't last that long (clothes, food)
Nonresidential Investment
expenditure by firms on machines, tools, plants, etc.
Residential Investment
expenditures by households or firms on new houses/apartment buildings
Intermediate Good
goods produced by one firm for further processing for final product of another firm
Disposable Personal Income
household income AFTER taxes
Personal Income
household income BEFORE taxes -- amount they have to spend or save
Surplus of Government Enterprises
income of government enterprises (was negative in 2009)
Proprietors' Income
income of unincorporated business
Net Interest
interest paid by businesses (NOT households and government bc it is not assumed to flow from the production of goods and services)
Changes In Business Inventories
inventories = goods that a business produced now but will sell later (i.e. unsold goods)
Durable Goods
last relatively long time (cars, fridges)
GDP Deflator
measure of change in overall price level calculated by averaging the percent changes in bundled price using the 2 base years OR nominal GDP/real GDP * 100
Income Approach
method of computing GDP: add up income (wages, interest, rent, profits) received by all factors of income in producing final goods/services
Expenditure Approach
method of computing GDP: add up total amounts spent on all final goods/services
How to calculate real GDP using a base year
multiply the quantity of goods and services by their prices in the base year
How to calculate GDP deflator
nominal GDP/real GDP * 100
Receipts of factor income from the rest of the world refers to... Is it included in GDP?
payment for work that AMERICANS are doing abroad (not included in GDP)
Payments of factor income to the rest of the world refers to... Is it included in GDP?
payments we are making to foreign workers working in America (included in GDP)
Personal Savings Rate
percent of DISPOSABLE personal income that is saved important indicator of household behavior (save more during recessions)
Nominal Output
price of a good in that year * quantity produced
Retained Earnings of corporations
profits that don't go back to households through dividends
Size of each category of personal consumption
services = by far the largest, over 40% of total GDP nondurables = around double that of durables
How BEA now adjusts for inflation in real GDP
takes average ("split the difference") of the changes computed using the two base years (instead of just using one base year calculation)
Depreciation
the amount by which an asset's value falls over a given period of time
National Income
the total income earned by the factors of production owned by a country's citizens
Services (under personal consumption)
things we spend money on without physical product (doctor's visits, education, etc.)
Gross Private Domestic Investment (I)
total investment in capital (new housing, plants, inventory, equipment)n by private sector
GDP
total market value of a country's output: all FINAL goods and services PRODUCED in the country during a given time frame
Underground Economy
transactions that should be counted in GDP but aren't (drugs, prostitution, etc.)
Compensation of employees includes...
wages/salary AND supplements: social insurance, pension funds, etc. paid by firms or government LARGEST part by far
Fixed-Weight Procedure
way of finding real GDP by using a base year's prices
Current Dollars
current prices we pay for goods/services this is how GDP is measured
Indirect Taxes Minus Subsidies
basically net income of government (sales tax, customs duties, license fees)
Fixed Weight Indexes
become less accurate the farther in time they are from the base year