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