FTC1 Chapter 5 and Chapter 7

How do economists statisticians measure GDP?

1. The Expenditure Approach: does not count used goods and financial assets 2. The Income Approach: divided into two categories - wage income; and Interest, rent, and profit income • BEA measures GDP by summing expenditures and by summing incomes. With no errors of measurement the two totals are the same, but in practice, a small statistical discrepancy arises. • A country's GNP is similar to its GDP, but GNP is the value of production by factors of production supplied by the residents of a country. • Nominal GDP is the value of production using the prices of the current year and the quantities produced in the current year. • Real GDP is the value of production using the prices of a base year and the quantities produced in the current year.

Total Expenditure

= C (consumption expenditure) + I (investment) + G (government expenditure on goods and services) + NX (net exports of goods and services)

Total Income

= C (consumption expenditure) + S (saving) + NT (net taxes)

Final Goods or Service

A good or service that is produced for its final user and not as a component of another good or service.

Intermediate Good or Service

A good or service that is used as a component of a final good or service.

Consumer Price Index

A measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services.

Cost of living index

A measure of the change in the amount of money that people need to spend to achieve a given standard of living.

Recession

A period during which real GDP decreases for at least two successive quarters; or defined by the NBER as "a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by contractions in many sectors of the economy."

Reference base period

A period for which the CPI is defined to equal 100. Currently, the reference base period is 1982-1984.

Business cycle

A periodic but irregular up-and-down movement of total production and other measures of economic activity.

Deflation

A situation in which the price level is falling and the inflation rate is negative.

Saving equals ______. A. income minus consumption expenditure minus net taxes B. income minus net taxes C. total income minus total expenditure D. net taxes minus government expenditure

A. income minus consumption expenditure minus net taxes

The following statements about the business cycle are correct except ______. A. it is a regular predictable cycle in real GDP around potential GDP B. from the peak to the trough, the economy is in a recession C. from the trough to the peak, the economy is in an expansion D. it is a periodic movement in economic activity including employment

A. it is a regular predictable cycle in real GDP around potential GDP

GDP price index

An average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices.

PCE price index

An average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices.

Two Consequences of the CPI Bias

Avoiding bias in the CPI is important for two main reasons. Bias leads to • Distortion of private contracts • Increases in government outlays and decreases in taxes

When using the income approach to measure GDP at market prices, in addition to summing all factor incomes it is necessary to ______. A. subtract depreciation because profit is not reported as net profit B. add depreciation because capital depreciates when goods are manufactured C. add indirect taxes less subsidies to convert aggregate income from factor cost to market prices D. add a statistical discrepancy which is the sum of depreciation and indirect taxes less subsidies

B. add depreciation because capital depreciates when goods are manufactured

Explain why the value of production, income, and expenditure are the same for an economy.

Because firms pay out everything they receive as incomes to the factors of production, total expenditure equals total income. That is, Y = C + I + G + NX. From the viewpoint of firms, the value of production is the cost of production, which equals income. From the viewpoint of purchasers of goods and services, the value of production is the cost of buying it, which equals expenditure. So the value of production equals income equals expenditure. • GDP is the market value of all final goods and services produced within a country in a given time period. • We can value goods and services either by what they cost to produce (incomes) or by what people are willing to pay (expenditures). • The value of production equals income equals expenditure.

The expenditure approach to measuring U.S. GDP equals ______. A. the sum of U.S. consumption expenditure and U.S. investment B. U.S. government expenditure minus taxes paid by Americans C. all expenditure on final goods and services produced in the United States in a given time period D. all expenditure by Americans on goods and services produced in the United States in a given time period

C. all expenditure on final goods and services produced in the United States in a given time period

Gross domestic product is the market value of all the ______ in a given time period. A. goods and services bought by Americans B. goods and services produced by American companies in all countries C. final goods and services produced by all firms located in the United States D. U.S.-produced goods and services bought in the United States

C. final goods and services produced by all firms located in the United States

A ______ is a final good and ______ is an intermediate good. A. new car bought by a student; a used SUV bought by a dealer B. new textbook; used textbook C. new iPhone bought by a student; new computer bought by Wal-Mart D. gasoline bought by you; jet fuel bought by Southwest Airlines

C. new iPhone bought by a student; new computer bought by Wal-Mart

Real GDP per person is not an accurate measure of the standard of living because it ______. A. includes the goods and services that governments buy B. omits the goods and services that people produce for themselves C. includes goods and services bought by firms D. omits the goods and services imported from other countries

D. omits the goods and services imported from other countries

Disposable personal income

Income received by households minus personal income taxes paid.

Exports of goods and services

Items that firms in the United States produce and sell to the rest of the world.

Imports of goods and services

Items that households, firms, and governments in the United States buy from the rest of the world.

Real GDP per person

Real GDP divided by the population.

Net taxes

Taxes paid minus cash benefits received from governments.

Saving

The amount of income that is not paid in net taxes or spent on consumption goods and services.

Core inflation rate

The annual percentage change in the PCE price index excluding the prices of food and energy.

Nominal wage rate

The average hourly wage rate measured in current dollars.

Real wage rate

The average hourly wage rate measured in the dollars of a given reference base year.

Depreciation

The decrease in the value of capital that results from its use and from obsolescence.

Statistical discrepancy

The discrepancy between the expenditure approach and the income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total.

Nominal interest rate

The dollar amount of interest expressed as a percentage of the amount loaned.

Government expenditure on goods and services

The expenditure by all levels of government on goods and services.

Consumption Expenditure

The expenditure by households on consumption goods and services.

Real interest rate

The goods and services forgone in interest expressed as a percentage of the amount loaned and calculated as the nominal interest rate minus the inflation rate.

Standard of living

The level of consumption of goods and services that people enjoy, on average.

Gross national product (GNP)

The market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country.

Gross Domestic Product (GDP)

The market value of all the final goods and services produced within a country in a given time period.

Chained-dollar real GDP

The measure of real GDP calculated by the Bureau of Economic Analysis.

Inflation rate

The percentage change in the price level from one year to the next.

Sources of Bias in the CPI

The potential sources of bias in the CPI are • New goods bias • Quality change bias • Commodity substitution bias • Outlet substitution bias

Underground production

The production of goods and services hidden from the view of government.

Household production

The production of goods and services in the home.

Investment

The purchase of new capital goods (tools, instruments, machines, buildings) and additions to inventories.

Net domestic product at factor cost

The sum of the wages, interest, rent, and profit.

Net exports of goods and services

The value of exports of goods and services minus the value of imports of goods and services.

Nominal GDP

The value of final goods and services produced in a given year expressed in terms of the prices of that same year.

Potential GDP

The value of real GDP when all the economy's factors of production—labor, capital, land, and entrepreneurial ability—are fully employed.

Real GDP

The value of the final goods and services produced in a given year expressed in terms of the prices in a base year.

Income

money received, especially on a regular basis, for work or through investments

market value

prices at which the items are traded in markets

Expenditure

the action of spending funds or an amount of money spent

Describe the uses of real GDP and explain its limitations as a measure of the standard of living.

• We use real GDP per person to compare the standard of living over time. • We use real GDP to determine when the economy has reached a business cycle peak or trough. • We use real GDP per person expressed in purchasing power parity dollars to compare the standard of living among countries. • Real GDP omits some goods and services and ignores some factors that influence the standard of living. • The Human Development Index takes some other factors into account.