Chapter 7

DI-Disposable Income

(Money Left After the Government Takes Taxes)

Government transfer payments include all of the following except:

wage payments to police officers

In order to construct a reliable price index, government accountants must assign a ______ to each of several categories of goods and services.

weight

The real-world, more complex GDP price index used in the United States is called the chain-type annual ____ price index.

weights

Smartbook

7

Base year

=100 Nom=Real Inflate years before base year. N<R Deflate years after base year. N>R

Real GDP

=Nominal GDP/Price Index x100

Nominal GDP

=Price index in given year=Price of market basket in specific year/ Price of same basket in base year x100

Which of the following is not an example of a personal consumption expenditure?

A fighter jet

Gross=

All

GDP- Included

All FINAL goods and services within a given year must be counted (included) once- but only once. Can count the final product, or the value-added during each stage of production.

Rule of 70

Approximate number of years required to double real GDP= 70/Annual percentage rate of growth

Income Approach

Compensation of employees(Wages and saleries) +Rents +Interest +Proprietor's Income +Corporate Profits +Taxes on production and imports =National Income National Income is all the money that flows to American owned/supplied resources whether here or abroad. GDP=NI-Net Foreign Factors Income + Statistical Discrepancy + Consumption of Fixed Capital.

Expenditure Approach

Consumption by Households+ Investment by Businesses+ Government Purchases+ Expenditures by Foreigners

DI=

Consumptions + Savings

PI-Taxes=

DI

Non-Durable goods

Doesn't last long Ex: Food, Gas

Personal Consumption Expenditures: C

Durable goods, Non-Durable Goods, and Services.

Real GDP

Economical Growth! We produce more.

Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?

Expenditures approach

GDP

Gross Domestic Product -This is the primary tool for assessing the overall health of our economy. -It is an Aggregate measure of DOMESTIC production. -Monetary Measure. -Big Number -If it wasn't money it would be a long list of domestic goods and products. Money means a lot more. -Important because it is CURRENT -GDP is reported each year. (One full calendar year)

The Expenditure Approach

Gross Private Domestic Investment 1) All final purchases of machinery, equipment, and tools by businesses.(Capital) 2) All construction(Houses, Bridges, Roads) 3) Changes in Inventory

GDP=

Households(Final G+S)-C Businesses are investments(Gross=Net+Depreciation)-Ig C and Ig are private Government(Fed+State+Local(Except transfer payments))-G G is Public Net Exports are the rest of the world(+Exports-Imports)-Xn

Changes in Inventory

Increase in Inventory? Add it to GDP because it was produced during the year but has not been counted. Decrease in Inventory? Subtract from GDP, because it was counted the first time in a non-current year.

What creates a problem in using money to value GDP?

Inflation

Including the value of _______ goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.

Intermediate

Which of the following measures the economy's overall performance?

National income accounting

GDP- Excluded

Intermediate goods. Those goods. Those goods that are purchased to produce another good. (Car, radios, windows, leather etc..) These are excluded to avoid multiple counting. (Which would make the GDP larger- Overstated) Nonproduction transactions. 1) Financial and 2) Second-hand 1a)Public Transfer(Public=Gov) 1b)Private Transfer Payments(Cash from Dad) 1c)Stock & Bond Transaction 2)Re-Sales ^Pre owned vehicles, and Pre-owned clothes(Thrift Store).

Net Exports

International Trade - Exports and Imports Exports are added Imports are subtracted We import more than export. Net export is usually Negative.

Which of the following statements are true of a price index?

It is expressed in terms of a base, or reference, year. It measures the price of a set of goods of services in a given year.

By ignoring the value of leisure time, how does national income accounting affect our well-being?

It understates our well-being.

Durable goods

Last 3+ years Ex: Laundry machines, Cars Too big to fit on a shelf? =Durable Goods

What are the two ways to adjust nominal GDP to reflect price changes?

Multiply the current year's output by price of the output in the base year. Divide nominal GDP by the price index.

Assessing The Economy's Performance

National Income Accounting measures the economy's overall performance. Like your annual check-up. "Doctors visits for the economy" BEA does the NIPA (National Income and Product Accounts) tables. Enables economists to track the long-run "health" of our economy to see whether it has grown, been constant, or declined. Sometimes then Policies will be formulated and implemented to maintain (safeguard) or improve our economy's health.

Government Purchases G

National Income Accounts, Government is the third component. Officially called "Government consumption expenditures and gross investments" 1) Expenditures for goods and services for providing public services. Federal, State, and Local purchases of final G&S (Just like C)+ direct purchases of resources. (Including Labor) 2) Expenditures for social capital such as schools, highways. Does NOT include transfer payments! They do nothing to add to GDP. (While being transferred.)

Net Private Domestic Investment

Net = Gross - Depreciation

Which are examples of negative gross domestic by-products?

Noise Polluted water Congestion

Which of the following are included in compensation of employees?

Payments by employers into social insurance for employees Payments by employers into private pension plans for employees Wages and salaries

Service

People do things for you Lawn Maintenance Biggest Part of the three, probably about 1/3

GDP doesn't measure...

Quality on products. Utility from leisure time. People who do work for themselves. (Washing the dishes instead of paying someone.) Damages to the environment. The happiness of a nation The underground economy.(Tips or anything illegal)

For the purposes of GDP accounting, what do government purchases include?

The purchase of new military equipment Spending on highway construction

As a measurement of economic output and the nation's wealth, GDP fails to account for which of the following?

The underground economy Nonmarket activities Improved product quality Leisure time

The market value of a firm's output minus the value of the inputs the firm has bought from others is called ______.

Value Added

The primary measure of the economy's performance is its annual total output of goods and services, which is called its ______.

aggregate output

Gross domestic product calculations count only final goods and services because ______.

counting all intermediate goods and services would lead to double-counting of many activities

The estimated amount of capital being used each year is called ______.

depreciation

Our Disposable income is...

divided up between savings or consuming-that is spending on final G&S.

The view of GDP as the sum of money spent on purchases is called the ______ approach.

expenditures

In order to determine GDP using the expenditures approach, all spending on ______ goods and services, not intermediate goods, is added up.

final

GDP can be measured using the ______ approach, which adds up all of the items that make up national earnings.

income

National _______ accounting measures the overall performance of the economy.

income

Two approaches to GDP

income approach and expenditure approach

GDP may be understated because ______.

nonmarket activities are not included in GDP

All income received by households, whether earned or unearned, is called ___ income.

personal

A(n) ________ _________ is a measure of a specified collection of goods and services in a given year as compared to the value of a highly similar collection of goods and services in a reference year.

price index

The main reason to participate in the underground economy is to avoid ______.

reporting actual income and paying income taxes

The ______ (social/opportunity) costs of negative gross domestic by-products reduce a nation's economic well-being.

social

More abundant leisure increases ______, but it ______ real GDP.

social welfare; decreases

The use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because ______ changes.

the value of money itself

Aggregate output is the primary measure of the economy's ______.

total output of goods and services

Social Security payments, welfare payments, and veterans' payments that the government makes directly to households are called government public ____ payments.

transfer

Which of these are components of government purchases in GDP?

~Expenditures for goods and services that the government consumes in providing public services ~Expenditures for publicly owned capital