Chapter 2

National income accounts

an accounting framework used in measuring current economic activity

Real GDP is a better measurement of economic growth than nominal GDP because

an increase in nominal GDP may show an increase in prices rather than an increase in output

Real GDP

and nominal GDP are equal in the base year because current prices and base-year prices are the same in the base year.

National wealth

domestic physical assets + net foreign assets Country's domestic physical assets (capital goods and land) Wealth matters because the economic well-being of a country depends on it

For the purposes of assessing an economy's growth performance, the more important statistic is

real GDP

The correct interest rate for studying most economic decision is the

real interest rate

Saving rate

saving/current income

Goods and services are counted in GDP at market value:

so that different types of goods and services can be added together

A problem with using market values to measure production is that:

some goods and services are not sold in formal markets

Since U.S. investment is generally higher than U.S. national saving:

the U.S. current account is generally negative

Product approach

the amount of output produced (value added)

Expenditure approach

the amount of spending by purchasers; assumes all products are sold revenues - money spent by public for a good

Income approach

the incomes generated by production profits + wages

Stock variables

variables measured at a point in time (quantity of money, value of houses, capital stock)

Three alternative approaches to national income accounting...

- Product approach - Income approach - Expenditure approach

Final goods and services

- don't count intermediate goods and services in GDP (production services) - capital goods are final goods since they aren't used up in the same period that they are produced

A nations GDP is defined as the market value of final goods and services newly produced within a nation during a fixed period of time. There are many practical issues that arise in measuring economic activity as defined above. What are some examples?

1) Some non-market goods and services, such as activities in the underground economy are estimated and partially incorporated in official GDP measure 2) The measure leaves out the economic costs of environmental degradation in the calculation of firms' contribution to output... upward bias 3) There are some useful goods and services that are not sold in formal markets and they are excluded from the measure... downward bias

What are correct statements about the national income?

1) the alternative approaches to measuring economic activity are useful because each approach gives a different perspective on the economy 2) The product approach to measuring economic activity is calculated as the sum of the value added by producers 3) There are three approaches to measuring current economic activity: product, income, and expenditure approaches. In principle, the three approaches give the same answer.

Market value

Allows adding together unlike items by valuing them at their market prices - problem: misses non-market items such as homemaking, the value of environmental quality, and natural resource depletion

Default assumption

Automatic, implicit, always compare marginal costs and benefits Both buyer and seller benefit from a transaction

Consumer price index

Base year one - overstate inflation Base year two - understate inflation

Product approach to measuring GDP

GDP is the market value of final goods and services newly produced within a nation during a fixed period

How does GDP differ from GNP?

GNP measures the output of factors of production owned by a nation, GDP measures production taking place in a nation

Wealth

Household wealth - a household's assets minus its liabilities National wealth = sum of all households, firms, and governments wealth with the nation

Uses of private saving

Investment Government budget deficit Current account balance

Real GDP

Nominal variables are those in dollar terms Real variables: adjust for price changes, reflect only quantity

Gross Domestic Product

The sum total of the value of all the goods and services produced in a nation

Gross National Product

The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.

Which of the following is not a use of an economy's private saving?

financing consumption ARE uses: financing investment in new capital, houses, and inventory lending to foreigners financing the government budget deficit

If a country employs foreign works, GDP is likely to be _____ than GNP

higher

A problem with using the expected real interest rate to study economic decisions is that

it is difficult to determine what the public's expected rate of inflation is

Flow variables

measure per unit of time (GDP, income, saving, investment)

Government spending

net government income minus government purchases of goods and services

Private saving

private disposable income - consumption