Chapter Eight: GDP: Measuring Total Production and Income (Part 3: Macroeconomics Foundations and Long-Run Growth)

Expenditure Approach requires information on:

1. Consumption 2. Investment 3. Government 4. Net Exports

The BEA divides its statistics on GDP into four major categories:

1. Consumption 2. Investment 3. Government Purchases 4. Net Exports

Shortcoming of GDP as a Measure of Total Production:

1. Does not include household production (values of goods/services not bought/sold in markets) 2. Does not include estimates for the underground economy (at most, estimated as 10% of calculated GDP)

Firms sells goods and services to three groups:

1. Domestic Households 2. Foreign Firms and Households 3. The Government

What are the two approaches to arrive at GDP?

1. Expenditures 2. Income

What are the three general uses of GDP?

1. Gauge economic activity from year to year 2. Establish corrective measures 3. Measure national well being

Factors of Production:

1. Labor 2. Capital 3. Natural Resources 4. Entrepreneurial Ability

GDP does not included two types of production:

1. Production in the home 2. Production in the underground economy

Examples of Government Purchases:

1. Teachers Salaries' 2. Highways 3. Aircraft Carriers

Shortcomings of GDP as a Measure of Well-Being:

1. The value of leisure is not included in calculation (think retirement) 2. It is not adjusted for pollution or other negative effects of production (think chemicals and cancer) 3. It is not adjusted for changes in crime and other social issues (think police and drug addiction) 4. It measures the size of the "pie," but not how the "pie" is divided (unequal distributions)

When the economy faces a downturn:

1. Unemployment increases 2. Income falls

Income is divided into four categories:

1. Wages 2. Interest 3. Rent 4. Profit

Total Income is divided among five categories:

1. Wages 2. Interest 3. Rent 4. Profit 5. Specific Non-Income Items

Income Approach requires information on the sum of all payments, including:

1. Wages/Salaries 2. Proprietors Income 3. Corporate Profit 4. Rental Income 5. Interest Income

Final Good/Service

A good/service purchased by a final user

Intermediate Good/Service

A good/service that is an input into another good or service

Price Level

A measure of the average prices of goods and services in the economy

GDP Deflator

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

Business Cycle

Alternating periods of economic expansion and economic recession

Expenditures on Durable Goods

Automobiles and furniture

The largest component of investment:

Business Fixed Investment

Underground Economy

Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods/services are illegal

Changes in Business Inventories

Changes in the stocks of goods that have been produced, but not yet sold

GDP (Expenditure Method) =

Consumption + Investments + Government + Net Exports Y = C + I + G + NX Where NX = X - M X = exports M = imports

Depreciation

Consumption of Fixed Capital; the production of new goods/services to replace old goods/services

What are the four major categories of​ expenditure?

Consumption, investment, government​ purchases, and net exports

Exports

Expenditures by foreign firms and households on domestically produced goods and services

Net Exports =

Exports - Imports

True or False: National Income (NI) is equal to GDP.

FALSE

True or False: Transfer Payments are included in GDP calculation.

FALSE; these payments are not included in GDP because they are not received in exchange for production of a new good/service

Firms use the:

Factors of Production

Households supply _________________ to firms in exchange for __________.

Factors of Production; Income

Banks, Stock, and Bond Markets make up the:

Financial System

Expenditures on Nondurable Goods

Food and Clothing

Imports

Foreign-produced goods/services

GDP per capita =

GDP / Population

Gross Domestic Income

GDP calculated as the sum of income payments to households

Why is GDP an imperfect measurement of total production in the​ economy?

GDP does not include household production or production from the underground economy

National income is

GDP minus depreciation

GDP per capita

GDP per person

Imports are:

Goods/services produced in foreign countries and purchased by U.S. firms, households, and governments

Purchases made by state and local governments are:

Greater than purchases made by the federal government

National Domestic Product (NDP) =

Gross Domestic Product (GDP) - Capital Consumption Allowance (Depreciation; CCA)

Government Spending on Transfer Payments:

IS NOT INCLUDED IN Government Purchases because the spending does NOT result in the production of new goods/services

Wages

Include all compensation received by employees, including fringe benefits such as health insurance

Profit

Includes the profits of sole proprietorships, which are usually small businesses, and the profits of corporations

Personal Income

Income received by households

Macroeconomic analysis provides:

Information that consumers and firms need in order to understand current economic conditions and to help predict future conditions

One of the goals of economic policy is to:

Maintain a stable price levvel

Expenditures on Services

Medical care, education, haircuts

Personal Income (PI)

Money received by households before taxes

Consumer spending on services is:

More than double the spending on durable and nondurable goods combined

True or False: Countries with lower levels of GDP per capita are better off.

Mostly FALSE; it is typically implied that countries with HIGHER levels of GDP per capita are better off; although increases in a country's GDP per capita often do lead to increases in the overall well-being of the population, it's important to be aware that GDP has a few shortcomings

National Income (NI) =

National Domestic Product (NDP) - Indirect Business Taxes (IBT)

Interest

Net interest received by households, or the difference between the interest received on savings accounts, government bonds, and other investments and the interest paid on car loans, home mortgages, and other debts

Transfer Payments

Payments made by the government to households for which the government does not receive a new good/service in return

Disposable Income (DI) =

Personal Income (PI) - Taxes

Disposable Personal Income =

Personal Income - Personal Tax Payments

Disposable personal income is

Personal income minus personal taxes

The estimate of real GDP can be somewhat distorted because:

Prices may change relative to each other, and this change is not reflected in the fixed prices from the base year; the further from the base year, the more distorted

Holding prices constant means that:

Purchasing power of a dollar remains the same from one year to the next

Household Production

Refers to goods/services people produce for themselves

National Income Accounting

Refers to the methods the BEA uses to track total production and total income in the economy

Rent

Rent received by households

Government Purchases

Spending by federal, state, and local governments on good/services

Investment (Gross Private Domestic Investment)

Spending by firms on new factories, machinery, office buildings, and additions to inventories, plus spending by households and firms on new houses; divided into three categories: business fixed investment, residential investment, changes in business inventories

Business Fixed Investment

Spending by firms on new factories, office buildings, and machinery used to produce other goods

Residential Investment

Spending by households and firms on new single-family and multi-unit houses

Consumption

Spending by households on goods/services, not including spending on new houses; divided into three categories: service expenditures, no durable goods expenditures, durable goods expenditures

True or False: Disposable Personal Income is the best measure of the income households actually have available to spend.

TRUE

True or False: In your base year, Nominal GDP = Real GDP.

TRUE

True or False: The total production is equal to the value of total income.

TRUE

True or False: GDP does NOT include the value of used goods/services.

TRUE; GDP only includes the goods/service PRODUCED during the given time period

True or False: In calculating GDP, we include the value only final goods/services.

TRUE; if we calculated the value of both intermediate goods/services with final goods/services, we would be double counting

Chain-Weighted Prices

Takes an average of the prices in the base year and the prices of year being evaluated; then, it uses this average to calculate real GDP; distortion is minimized

Exports are goods and services produced in ___________ and purchased by _______________________.

The U.S.; foreign firms, households, and governments

Economic Growth

The ability of an economy to produce increasing quantities of goods/services

Real GDP per capita is often used as a measure of general​ well-being. While increases in real GDP often do lead to increases in the​well-being of the​population, why is real GDP not a perfect measure of​well-being?

The costs of pollution are not included, the value of leisure is not included, GDP does not include crime rates or income distribution

Measure production by taking:

The dollar value of all the goods/services produced

Profti

The income that remains after a firm has paid wages, interest, and rent; return to entrepreneurs and other business owners for bearing the risk of producing and selling goods/services

Value Added

The market value a firm adds to a product

Gross Domestic Product (GDP)

The market value of all final goods and services produced in a country during a period of time, typically one year

Inflation Rate

The percentage increase in the price level from one year to the next

Recession

The period of a business cycle during which total production and total employment are decreasing

Expansion

The period of a business cycle during which total production and total employment are increasing

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

National Income (NI)

The total value of production of land, labor, capital, and entrepreneurial ability within ONE YEAR, looking at what is earned over the factors of production within that year

Real GDP

The value of final goods and services evaluated at base-year prices

Nominal GDP

The value of final goods and services evaluated at current-year prices

Gross National Product (GNP)

The value of final goods and services produced BY the residents of the U.S., even if the production takes place OUTSIDE the U.S.

Gross Domestic Product (GDP)

Total market value of all final goods and services produced by firms and individuals within the same nation during a given period of time

Governments make _____________ to households in exchange for hiring workers/other factors of production

Transfer Payments

True or False: When measuring GDP over long periods of time, the omission of the Underground Economy and Household Production can significantly impact importance of the collected data.

True; it does not differ much from year to year, but over a decade, it can heavily skew interpretation

Firms pay _________ to households in exchange for labor services, interest for the use of capital, and rent for natural resources such as land.

Wages

The largest component of gross domestic income is:

Wages

Total Income of an Economy =

Wages + Interest + Rent + Profit

GDP (Income Approach) =

Wages/Salaries + Proprietors Income + Corporate Profit + Rental Income + Interest Income

GDP is frequently used as a measure of:

Well-being

GDP Equation

Y = C + I + G + NX