Econ 202 - Ch. 7

GDP can be calculated 3 ways

1. add up the value added of all producers 2. add up all the spending on domestically produced final goods and services (GDP = C + I + G + X - IM) C = consumer spending I = investment spending G = government purchases of goods & services X = sales to foreigners IM = imports 3. add up all income paid to factors of production

The national income and product accounts (NIPA) does 3 things 1. 2. 3.

1. measure our nation's economic performance 2. compare American income and output to that of other nations 3. track the economy's condition throughout the business cycle

The National Accounts keep track of.... 1. 2. 3. 4. 5.

1. spending of consumers 2. sales of producers 3. business investment spending 4. government purchases 5. a variety of other flows of money between different sectors of the economy

Suppose country A sells $100 million worth of goods and services to country B. Country B sells $50 million worth of goods and services to country A. These are the only two countries in macro world. Net exports in country A. B equal -$50 million B. A equal $150 million C. A equal -$150 million D. B equal $50 million

A. B equal -$50 million

The total income households have after paying taxes and receiving government transfers is called: A. disposable income B. private savings C. aggregate spending D. investment

A. disposable income

Investment spending is: A. spending on productive physical capital B. spending on bonds C. spending on shares of stock D. spending on productive physical capital, on bonds, and on shares of stock

A. spending on productive physical capital

How can you compare the sizes of two economies when they produce different things?

By comparing the value of their production - GDP (gross domestic product) is the most important and common way to estimate an economy's size

Are the following included in U.S. GDP (1) the price paid by a German tourist when staying at a New York hotel (2) the price paid by an American tourist when staying at a Berlin hotel A. both are included in U.S. GDP B. neither is included in U.S. GDP C. only the price paid by a German tourist when staying at a New York hotel is included in U.S. GDP D. only the price paid by an American tourist when staying at a Berlin hotel is included in U.S. GDP

C. only the price paid by a German tourist when staying at a New York hotel is included in U.S. GDP (within the physical border of the U.S.)

GDP is: A. the total dollar value intermediate goods and services produced in the economy in a given period B. the total dollar value of wages paid to producing workers in a given period C. the total dollar value of final goods and services produced in the economy in a given period D. the total dollar value of government production in a given period

C. the total dollar value of final goods and services produced in the economy in a given period

Income spent on imported goods: A. represents income that has leaked across national borders B. must be subtracted from spending data to calculate an accurate value for GDP C. is income that is not spent on domestically produced goods and services D. all the above

D. all the above

FACT within a country.... only production that takes place within the borders of a country is included in GDP

Examples - Cars produced in Mexico by American firms: NOT included in U.S. GDP - Cars produced in the U.S. by Japanese firms ARE included in the U.S. GDP

fact about GDP (flip card)

GDP in a year..... GDP is like annual income: it measures a rate of production during a given period

GDP: what's included and not included? Included (1) Not Included (5)

Included: - domestically produced final goods and services, including capital goods, new construction of structures, and changes to inventories NOT included: - intermediate goods and services - inputs - used goods - financial assets, such as stocks and bonds - goods & services produced outside this country

True/False? Households don't spend all of their disposable income. Some of it is saved in the financial markets.

TRUE !!!

market basket

a hypothetical set of consumer purchases of goods and services

aggregate price level

a measure of the overall level of prices in the economy - to measure the aggregate price level, economists calculate the cost of purchasing a market basket

Private Savings

disposable income minus consumer spending (disposable income that is not spent on consumption)

Real vs. Nominal GDP

except in the base year, real GDP is NOT the same as nominal GDP: output valued at current prices

intermediate goods and services

goods and services (bought from one firm by another firm) that are inputs for production of final goods and services

Imports

goods and services PURCHASED from other countries

Exports

goods and services SOLD to other countries

final goods and services

goods and services sold to the final, or end, user

Spending = Income

it doesn't matter HOW we measure the production, since one person's spending is another's income

consumer price index (CPI)

measures the cost of the market basket of a typical urban American family inflation rate = price index in 2 years - price index in year 1/ divided by price index in 1 year times 100%

GDP deflator

measures the price level by calculating the ratio of nominal to real GDP (for a given year is 100 times the ratio of nominal GDP to real GDP in that year)

government transfer

payment by the government to individuals for which no good or service is provided in return

What does GDP measure?

production - sale of USED goods NOT included - sale of FINANCIAL ASSETS, such as stocks and bonds, are NOT included

producer price index (PPI)

similar to the CPI but measures changes in the prices of goods purchased by producers

Investment Spending

spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories

Inventories

stocks of goods and raw materials held to facilitate business operations

price index = cost of market basket in a given year/ cost of market basket in base year times 100

the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year

What is GDP?

the market value of all final goods and services produced within a country in a year

Government Borrowing

the total amount of funds borrowed by federal, state, and local governments in the financial markets

Real GDP

the total value of the final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

Nominal GDP

the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced

value added

the value of its sales minus the value of its purchases of intermediate goods and services

Government Purchases of Goods and Services

total expenditures on goods and services by federal, state, and local governments

Disposable Income

total household income minus taxes; available to spend on consumption or to save

inflation rate

yearly percentage change in a price index, typically based upon consumer price index, or CPI, the most common measure of the aggregate price level