chapter 7
How is GDP calculated under the income approach?
-count income derived from production -wages + rents+ interest + profits
DPI
-disposal income -consumption of savings -amount of income that households have left over after paying their personal taxes
What does the U.S. underground economy comprise?
-gamblers, drug dealers, hookers, unreported tips, unreported sales recipients, cash only jobs, exchanged goods and services
Government purchaes (G)
-includes expenditures for goods and services that the government uses to provide public services (schools and roads) -exlcudes gov't transfer payements (social security)
NI
-national income -NDP+ net foreign income
NDP
-net domestic product -GDP-consumption of fixed capital aka depreciation
Shrotcomings of GDP
-non market activities -leisure -improved product quality -underground economy -environmental and noneconomic
PI
-personal income -all income received whether earned or not earned
How large is the underground economy?
8% of recorded GDP in USA 7.2% globally
GDP calculated under expenditures approach
Consumption by households + investment by businesses + gov't purchases + expenditures by foreigners
How are intermediate goods accounted for in calculating GDP?
GDP includes only the market value of final goods and ignores intermediate goods, which are goods either purchased for resale or for further processing into final goods.
What happens to the value of a dollar over time in relation to GDP?
GDP only measures production at current dollar values but is a problem bc the value of a dollar changes over time
Alternative method to use to calculate a price index
Gather separate data on physical outputs and their prices, from this info you can determine the market value of outputs in successive years if the base year price prevails. Once determining the real GDP through the info, you can identify the price index for a given year by diving nominal GDP/real GDP
Net exports
Xn=exports(X)-imports(M)
gross private domestic investment (Ig)
all final purchases of machinery, equipment and tools by businesses; ways business invest in themselves -GDP = C + Ig + G + Xn
What does NI measure?
all income earned through the use of American owned resources at home or abroad -includes taxes on production and imports
Nominal GDP
based on prices that were in effect when the output was produced
real GDP
changes in price level
personal consumption expenditures
expenditures by households on goods/services during a year
Improved product quality
fails to capture full value of improvements in product quality
nondurable goods
food,clothing, gasoline
Net private investment
gross investment- deprecation
durable good
having a life of 3 or more years
Underground economy
illegal/legal activities that produce income that is not measured traditionally
what does NDP measure
measures the total annual output that entire economy can consume without impairing its capacity to produce in ensuing years
value added approach
measuring the additional value that is created in every stage of production
GDP
monetary value of all final goods/services produced in an economy during a given time period
How does price index help convert nominal GDP into real GDP?
nominal GDP/price index=real GDP
What does GDP exclude?
nonproduction transaction because they have nothing to do with the generation of final goods. They can be purely financial transitions and second-hand sees
How is GDP by the expenditure approach related to GDP by the income approach?
on the expenditures side of GDP all final goods produced by the economy are bought either by three domestic sectors/foreign buyers. On the income side the total receipts acquired from the sale of that total output are allocated to the suppliers of resources as wage/rent/interest/profit
Transfer payment
payment of money by gov't to a household for which the payer receives no good/service in return
What are the GDP split into by the gov't?
personal consumption expenditures (C) and gross private domestic investment (Ig)
How is price index calculated?
price of market basket in specific year/price of same market basket in base year * 100
Non market actitivities
productive activities occur outside any market that are not measured in tradiitonal way
Purely financial transactions
public transfer payements (ss and welfare) , private transfer payments (gifts), and stock market transactions
Environmental and nonecomonic
sources of well-being that are problematic bc GDP does not have way to accurately value and report the issues
GDP under income approach
wages + rents + interests + profit + statistical adjustments
Leisure
weekends/holidays that add value and satisfaction to workers
How does the size of U.S. real GDP compare with other countries GDP?
U.S. is better off;GDP does not measure well being