chapter 7,8,&9

personal consumption expenditures symbol

C

GDP formula

C+Ig+G+Xn (C + Ig + G + X − M)

calculating GDP using expenditures approach

Consumption expenditures by households + Investment expenditures by businesses + government purchases of goods and services + expenditures by foreigners

why is composition of output a shortcoming when calculating Real GDP?

GDP does not tell us whether the currently produced mix of goods and services is enriching or potentially detrimental to society

Nominal Gross Domestic Product

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

Net domestic product (NDP)

GDP minus the consumption of fixed capital; simply GDP adjusted for depreciation

private transfer payments example

Gifts, inheritances, charitable contributions

Real Gross Domestic Product

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year

Expenditures Approach to GDP

The method that adds all spending made for final goods and final services

Income Approach to GDP

The method that adds all the income generated by the production of final goods and services

Composition of output

The mix of goods and services produced and sold in an economy.

base year

The year with which other years are compared when an index is constructed

primary measure of economy's performance

aggregate output of goods or services

personal income

all income received by households, whether earned or unearned

financial investment

captures what ordinary people mean when they say investment (namely, the purchase of assets like stocks)

What is the GDP price index used in the United States called?

chain-type annual-weights price index

corporate profit subcategories

corporate income taxes, dividends, and undistributed corporate profits

personal consumption expenditures

covers all expenditures by households on goods and services

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?

deflate GDP when prices rise and to inflate GDP when prices fall. This is accomplished by choosing a reference year and then using the output prices that prevailed in that reference year to value the quantities of output produced in other years.

Comparing market values over time has the

disadvantage that prices change over time.

government can raise living standard over time by

encouraging savings and investment

net exports formula

exports - imports

second hand sales

final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced.

GDP counts only

final products, domestic output (nations borders)

gross private domestic investment

final purchases of plant machinery and equipment by business enterprises, residential construction, changes changing in inventories, expenditures on the research and development of new production technology, and money spent on the creation of new works of arts, software; expenditures for newly produced capital goods and for additions to inventories

National income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production because

it is impossible to summarize two different goods, say, oranges and computers, as a single statistic

Macroeconomics focus on just a few key statistics when trying to understand the health and trajectory of an economy because

it's too difficult to process all of the information in each market or for every good or service in the economy

Nation Income Accounting

measures the economy's overall performance

Real GDP

measures the value of final goods and services produced within the borders of a country during a specific period of time, typically a year.

how to calculate GDP

money final person spends, or value added

Propreitor's Income

net income of sole proprietorships, partnerships, and other unincorporated businesses

Real GDP formula

nominal GDP / price index (in hundredths)

modern economic growth

output per person rises

disposable income equation

personal income - personal taxes

output per person

population/output

Price Index Equation

price of market basket in specific year / price of same market basket in base year x 100

purely financial transactions

public transfer payments, private transfer payments, stock market transactions

economic growth is calculated as a percentage..

rate of growth per quarter (3-month period) or per year

nation's stock of capital

the collection of human-made resources that help to produce goods and services. can be divided into two categories: tools and recipes

Gross Domestic Product (GDP)

the dollar value of all final goods and services produced within a country's borders during a specific period of time

aggregate output

the economy's total production of goods and services for a given time period

economic investment

the expansion of the economy's productive capacity (such as spending that pays for production of factories

value added

the market value of a firm's output minus the value of the input the firm has has bought

interest income

the money paid by private businesses to the suppliers of loans used to purchase capital

national income

the total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports; all the income that flows to U.S.-supplied resources, whether here or abroad, plus taxes on production and imports.

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. (AKA retained earnings)

recipes

intangible methods, techniques, and management practices necessary to produce goods and services

Economists define economic growth as either:

An increase in real GDP over some time period or an increase in real GDP per capita over some time period.

How do manufacturing firms try to deal with unexpected changes in demand?

Maintaining an inventory

Methods of finding real gdp

Method 1 1.Find nominal GDP for each year. 2.Compute a GDP price index. 3.Divide each year's nominal GDP by that year's price index (in hundredths) to determine real GDP. Method 2 1.Break down nominal GDP into physical quantities of output and prices for each year. 2.Find real GDP for each year by determining the dollar amount that each year's physical output would have sold for if base-year prices had prevailed. (The GDP price index can then be found by dividing nominal GDP by real GDP.)

equation to derive NI from NDP

NDP - Statistical discrepancy + Net foreign factor income

personal income equation

National income - Taxes on production and imports - Corporate income taxes - Social Security contributions - Undistributed corporate profits + Transfer payments

Shortcomings of GDP

Nonmarket activities Leisure Improved product quality The underground economy GDP and the environment Composition and distribution of the output Noneconomic sources of well-being

why is leisure and psychic income a shortcoming when calculating Real GDP?

Our system of national income accounting understates well-being by ignoring leisure's value. Nor does the system accommodate the satisfaction—the "psychic income"—that many people derive from their work.

gross domestic by-product

Pollution accompanied with the growth of GDP; not included in GDP (although money spent to clean up pollution is included)

nonproduct transaction that have to be excluded from GDP

Purely financial transactions and second hand sales

Who perfected an efficient steam engine that could power not only steamships and steam locomotives, but also factory equipment that helped the start of the Industrial Revolution?

Scottish inventor James Watt

government purchases components

(1) expenditures for goods and services that the government consumes in providing public services; (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes; and (3) government expenditures on R&D and other activities that increase the economy's stock of know-how

personal consumption expenditures percentages

10% durable goods, 30% nondurable goods and 60% services

Real GDP in the United States has grown by about ___ percent annually since 1950, while real GDP per capita has grown by roughly ___ percent annually over the same period.

3.1; 2.0

Approximate number of years required to double gdp =

70/annual percentage rate of growth

Consumption of fixed capital (depreciation)

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product

why is improved product quality a shortcoming when calculating Real GDP?

Because GDP is quantitative rather than qualitative, so it fails to capture the full value of improvements in product quality

economic investments vs financial investment

Economic investment involves the creation of new productive capital, either new tools or new recipes. By contrast, financial investments merely transfer the ownership of existing assets; they do not produce new capital goods

Gross Domestic Product Price Index steps

First, we assemble data on the price changes that occurred over various years Then we use those price changes to establish an overall price index for the entire period. Finally, we use the index value for a particular year to adjust that year's nominal GDP into that year's real GDP.

government purchases symbol

G

private domestic investment spending symbol

I

gross private domestic investment symbol

Ig

Imports symbol

M

why might someone want to be a part of the underground economy?

Some of the people who conduct business there are bookies, smugglers, fences of stolen goods, and drug dealers. 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)

nondurable goods

Tangible items that are consumed within a short time, around 3 years

Real GDP per capita

The amount of real output per person in a country (Real GDP/ Population)

why is distribution of output a shortcoming when calculating Real GDP?

The distribution of output may make a big difference for society's overall well-being

Net exports symbol

Xn

price index

a measure of the price of a specified collection of goods and services in a given year as compared to the price of an identical collection of goods and services in a reference year

market basket

a specified collection of goods and services

government sector inflows and outflows

an inflow of revenue from various types of taxes and an outflow of disbursements in the form of purchases and transfers

An economy's output, in essence, is also equal to its income because

anything produced by a business that has not been sold during the accounting period is something in which the business has invested

dividends

art of after-tax profits that corporations choose to pay out, or distribute, to their stockholders. They flow to households.

durable goods

good that lasts for at least 3 years when used regularly

net private domestic investment

gross private domestic investment less consumption of fixed capital (depreciation) ; the addition to the nation's stock of capital during a year

Net Rent

gross rental income minus depreciation of the rental property

Typically a higher saving rate is associated with

higher investment rates and higher rates of growth.

0/a

horizontal line (0)

Taxes on Production and Imports

includes general sales taxes, excise taxes, business property taxes, license fees, and customs duties (ex: if you purchase something for $1+tax, 1 dollar goes to the seller and $0.07 to the government; $0.07 is taxes on production and imports when included in GDP)

Why are expectations important?

increased pessimism leads to less current investment and less future consumption and when expectations are unmet firms are forced to cope with shocks

household sector inflows and outflows

inflow of disposable income and outflows of consumption spending and savings

business sector inflows and outflows

inflows from three major sources of funds for business investment and an outflow of investment expenditures

shocks

situations where they were expecting one thing to happen but something else happens instead

public transfer payment example

social security, welfare and veteran's payments

If inventories decline by $1 billion during 2022, then $1 billion would be

subtracted from both gross private domestic investment and gross domestic product

gross output (GO)

sums together the dollar values received by the firms at each stage of production

how to go from net income to gdp

take out (-) the income Americans gain from supplying resources abroad and add (+) in the income that foreigners gain by supplying resources in the United States. That process yields net foreign factor income

Tools

tangible physical objects that help to produce goods and services

disposable income

the amount of income that households are free to dispose of (spend or save) after meeting all their legal tax obligations

why are nonmarket activities a shortcoming when calculating Real GDP?

they do not show up in GDP because government accountants receive data only on economic transactions involving market activities. Consequently, GDP understates a nation's total output because it does not count unpaid work

Why do national income accountants add taxes on production and imports to wages, rent, interest, and profits in determining national income?

to account for expenditures that are diverted to the government

supply shock

unexpected changes in the supply of goods and services

a/0

vertical line (infinity)

calculating GDP using income approach

wages + rent + interest + proprietors' income + corporate profits + taxes on production and imports to ( = national income) - net foreign factor income + consumption of fixed capital and a statistical discrepancy