Ch. 21 ECON

Investment

Refer to spending on new capital assets that increase the economy's productive capacity. It includes both the purchase and the production of long-lived assets that contribute to future production. Building a factory is an investment because you'll use it to produce goods for many years. Office furniture, computers, and airplanes are all investments in equipment that you'll use to produce more goods and services. Business investment also includes spending on research and development. New inventories are counted as a form of investment because they'll lead to future sales.

GDP per person

(sometimes called GDP per capita), which is total GDP divided by the population.

gross domestic product (GDP)

A key measure of economic activity. Specifically, it's the market value of all final goods and services produced within a country in a year.

Value added

Based on the idea that at each step of the production process, a company uses materials prepared by others, and then transforms them into something more valuable. The amount by which your company increases the value of an item is called its VALUE ADDED, and it's a measure of your contribution toward producing that item. This means that your company's value added is your total sales minus the cost of the intermediate goods and services you bought from other firms.

Real GDP

GDP measured in constant prices, so that it excludes the effects of price changes. By focusing only on changes in GDP due to changes in the quantity of output produced, real GDP isolates economic growth. It's calculated by adding up GDP as if no prices changed between last year and this year. It's called real GDP to remind you that it measures the real change in production, rather than changes in the price tags attached to each product. When you're trying to evaluate changes over time in economic activity, you should analyze real GDP instead.

Nominal GDP

GDP measured in today's prices. To calculate nominal GDP you add up the market value of total production in a year using the current prices prevailing in that year. Nominal GDP is useful if you want to know what GDP is right now, based on the prices that you face right now. However, nominal GDP is not very useful for making comparisons over time. The problem is that when prices rise over time—a process known as inflation, nominal GDP will rise even when actual production is unchanged.

Final goods and services

GDP only counts final goods and services, which are finished goods or services.

Imports

Goods and services that are produced in other countries and purchased by domestic American buyers. Because imports aren't produced domestically, they're excluded from GDP. This means that your spending on Canadian maple syrup isn't included in U.S. GDP.

Exports

Goods and services that we produce domestically in the United States and sell to people and businesses in other countries. Because exports are produced domestically, this spending is included in GDP.

Net exports

The spending on exports minus spending on imports. Foreign purchases of our goods less our purchases of foreign goods is called net exports. GDP adds in exports and subtracts imports. This is why it counts net exports.

Transfer payments

Transfer payments, which transfer income from one entity (the government) to another (an individual). Because transfer payments involve no new production of goods or services, they're not counted in GDP. The term government purchases might sound a bit clunky, but the word purchases is there to remind you that it's all about the stuff the government buys (and so excludes transfers). When the government pays the salary of a teacher or a corporal in the Marines, it's paying them to produce educational or defense services, so their salaries are counted in GDP as government purchases. But a lot of government spending doesn't count as government purchases. For instance, the government sends out billions of dollars in Social Security and unemployment insurance checks.

Consumption

When your household buys goods and services, it's counted in GDP as consumption. Your consumption includes goods such as food, clothes, and gas, as well as services such as doctor visits, bus fares, and your cell phone bill. It also includes durable goods, which are long-lasting goods such as cars, couches, and washing machines. Even though durable goods take many years to fully use, they're counted as consumption in the year that they're purchased.

government purchases

Whenever the government buys stuff—goods and services—it's counted as government purchases. This includes local government spending on schools, state government expenditures on highways, and federal government outlays on the military.

Macroeconomics

Which is the study of the economy as a whole. The macroeconomy—that is, the economy as a whole—is simply the result of a whole bunch of individual decisions and interactions. Don't think about micro- and macroeconomics as distinct halves of economics. Rather, think about macroeconomics as being built upon your understanding of microeconomics.

Rule of 70

says that you can figure out approximately how many years it will take something to double if you divide 70 by its annual growth rate: Years it takes something to double≈ 70 / Annual growth rate. Use the Rule of 70 to evaluate long-run growth rates.