Chapter 6 & 7

Disposable Income (DI)

personal income - personal taxes

If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP?

Nominal GDP would rise, but real GDP would be unchanged. (Nominal captures $ over time)

Financial Institutions

collect savings from households and lend them to businesses

Personal Consumption Expenditures (C)

durable goods (3+ yrs), nondurable goods and services

"Shock"

expecting one thing to happen but something else does

Net investment

gross investment - depreciation

Inflexible prices "sticky prices"

help explain how unexpected changes in demand lead to fluctuations in GDP and employment (business cycle)

Productive capacity expand

if more structure and capital equipment are produced in a given year than are used up

Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last year's pizzas) but sold them for $12 each. Based on this information we can conclude that Harry's production of large pepperoni pizzas this year:

increased nominal GDP by $20,000 but left real GDP unchanged.

Real GDP is preferred to nominal GDP as a measure of economic performance because:

nominal GDP uses current prices and thus may over- or understate true changes in output.

GRAPH #15

on connect

national income accounts

provide basis of appropriate public policies to improve economic performance

Financial Investment

purchase of assets like stocks, bonds or real estate

If an economy wants to increase its current level of investment, it must:

sacrifice current consumption.

The business cycle depicts:

short-run fluctuations in output and employment.

productive capacity static

when gross investment and depreciation =

productive capacity decline

when gross investment is less tan depreciation

Economic Investment

~$ spent purchasing newly created capital goods such as, machinery, tools, factories and warehouses. ~what economists mean "investment"

Gross Private Domestic Investment (Ig)

~all final purchases of machinery, equipment and tools ~all construction ~changes in business inventory (inventory build up, sell more than produced- neg #, noninvestment transactions- doesn't include transfer of stocks and bonds/paper assets or real assets/houses, jewelry, etc

Net Exports (Xn)

~all spending on final goods produced in US ~exports - imports

Net Private Domestic Investment (In)

~depreciation (consumption of fixed capital) ~net investment ~productive capacity-expand, static or decline

GDP doesn't include....

~existing assets or property sold or transferred, including used items ~purely financial transactions (public, private, stock and bonds); social security, cash welfare benefits, student allowance, alimony payments ~secondhand sales (don't represent CURRENT output); however any value added between purchase and resale is included

National Income (NI)

~income earned by American-owned resources ere or abroad. ~adjust NDP by + net foreign factor income (neg # if foreigners earned more in US than American resources earned abroad)

Nominal GDP

~measures dollar value or all goods and services produced USING THEIR CURRENT DURING THE YEARD PRODUCED ~GDP measures CURRENT dollars ~measures both changes in output and changes in $ over time

Real GDP (output)

~measures final goods and services produced DURING A GIVEN PERIOD OF TIME ~GDP measures in CONSTANT dollars (or GDP less the effect of inflation) ~measures to determine changes in economic activity across time

GDP includes...

~only final products and services ~brokers fee included (stocks & bonds not) ~payments made for cleaning up oil spills, healthcare for cancer victim)

Government Purchases (G)

~spending by all levels of government (fed, state, local) ~direct purchases of resources (labor particularly) ~EXCLUDES transfer payments (don't reflect current production)

GDP

~total market value of all final goods and services produces within a country in one year ~value of whats produced not whats been sold

GDP=

C + Ig + G + Xn

Net domestic product (NDP)

equal to GDP - depreciation allowance (consumption of fixed capital)

Personal Income (PI)

income received by households ~NI - payroll taxes (social security contribution) - corporate profits taxes - undistributed corporate profits + transfer payments

3 adjustments to compare international living standards

1. convert each country's GDP into US $ 2. divide each countrys GDP measured in $ by the size of its population 3. adjust per capita using the Purchasing Power Parity Method (bc some goods are cheaper in poorer countries)

Base year price index is always ________

100

Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to personal consumption expenditures and thus to GDP during the year?

$160,000

Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data. Year Nominal GDP; Billions Price Index (2005 = 100); Real GDP 1968 $909.80 22.01 1978 $2,293.80 40.40 1988 $5,100.40 66.98 1998 $8,793.50 85.51 2008 $14,441.40 108.48 Find Real GDP (billions & the effect of nominal GDP)

1968 GDP: $909.80 ($909.8/(22.01/100)) Price Index: 22.01 Real GDP: 4133.58 Effect on GDP: increase / inflating (price index below 100) 1978 GDP: $2,293.80 Price Index: 40.40 Real GDP:5,677.72 increase / inflating 1988 GDP: 5,100.40 Price Index: 66.98 Real GDP: 7,614.81 increase / inflating 1998 GDP: $8,793.50 Price Index: 85.51 Real GDP: 10,283.59 increase / inflating 2008 GDP: $14,441.40 ($14,441.4/(108.48/100)) Price Index: 108.48 Real GDP: 13,312.50 decrease / deflating (price index above 100)

Suppose the total monetary value of all final goods and services produced in a particular country in 2010 is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can conclude that:

GDP in 2010 is $500 billion.

Why are economists concerned about inflation?

Inflation lowers the standard of living for people whose income does not increase as fast as the price level.

Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $100 million to $200 million between one year and the next. a. Assuming that the price of gold increased by 100 percent over the same period, by what numerical amount did Glitter Gulch's real output change? b. If the price of gold had not changed, what would have been the change in Glitter Gulch's real output?

a. 0 b. 100

Suppose that in 1984 the total output in a single-good economy was 7,000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets were produced. a. What is the GDP price index for 1984, using 2005 as the base year? b. By what percentage did the price level, as measured by this index, rise between 1984 and 2005? n/r incorrect percent. c. What were the amounts of real GDP in 1984 and 2005?

a. 62.5 (10/16=0.625 x 100= 62.5) b. 60% (100-62.5)/62.5=.60) (16-10)/10=.60) c. 1984: $112,000 (Nominal GDP: $70,000 = $10 × 7,000. The price indexis 62.5. Thus, real GDP = $70,000 (nominal output 1984)/(62.5/100)= $70,000/0.625 = $112,000. 2005: $352,000 (Nominal GDP: $352,000 = $16× 22,000. The price index is 100. Thus, real GDP = $352,000 (nominal output 2005)/(100/100) $352,000/1 = $352,000.)

Chain-type annual-weighs price index

actual GDP price index in US

National income accounting

measures the economys performance by measuring flows of income and expenditures over a period of time

Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the question on the basis of these data. Years; Units of Output; $ per unit Year 1: 3 units; $3 Year 2: 4 units; $4 Year 3: 6 units; $5 Year 4: 7 units; $7 Year 5: 8 units; $8

nominal GDP overstates increases in real output.