Macro - Chapter 6

Equation for GDP using the expenditure approach

GDP = C + I + G + Ex - Im (CIGEI) personal consumption + gross private domestic investment + government consumption and gross investment + exports - imports

Real GDP

GDP adjusted for price changes/inflation

Nominal GDP

GDP measured in current dollars

Difference between GDP and GNP

GDP: produced in country by anyone GNP: produced by country citizens anywhere

Net National Product

GNP - depreciation

GDP and GNP equation

GNP = GDP + receipts of factor of income from world - payments of factor of income to the world

Net Investment

Gross Investment (I) - Depreciation - measure of how much the stock changes

GNP

Gross National Product total market value of all goods/services produced by a country's CITIZENS or country owned factors of productions (i.e. a factory or plant), regardless of where the output is actually produced

Government Spending (G)

Includes all government consumption and investment on finals goods/services

GNP and Net National Product equation

NNP = GNP - Depreciation

Is national income = GDP?

NO! need to subtract/add some stuff (see equation)

NNP and National Income equation

National Income = NNP - statistical discrepency

Are the purchase of​ stocks, bonds, and mutual funds part of gross private domestic investment?

No!

Is residential investment a main category of consumer expenditure?

No! It's gross private domestic investment

Equation for Disposable Income

Personal Income - Personal Taxes

What counts as private investment in GDP?

Unsold cars that were made that year

Are unsold products counted towards GDP?

Yes! They have still been produced. They go towards "private investment"

How to calculate inflation using GDP deflators

(new deflator-old deflator)/old * 100

Main categories of consumer expenditure

- Services - Durable goods - Nondurable goods

Mexican firm in the US is manufacturing something. Whose GNP and/or GDP are the products a part of?

- U.S. GDP - Mexican GNP

What 8 categories are included in national income?

- employee compensation - proprietor's income - rental income - corporate profits - net interest - indirect taxes minus subsidies - net business transfer payments - surplus of government enterprises

Problems with fixed-weight system

- ignores structural changes to economy - ignores possibility of economy just responding to supply shifts, and therefore decreasing demand/changing prices

Gross National Income (GNI)

- new method by World Bank to compare GDPs in common currency without worrying about instability of exchange rates - uses average of several years' exchange rates, adjusted for inflation, to convert everything to dollars

Three Categories of Personal Spending

- personal consumption - personal interest payments - transfer payments made by households

Things GDP doesn't count

- pollution - reduction in crime - happiness - leisure time - housework (which, if serviced out, would count) - income distribution

Categories of gross private domestic investment

- residential investments - nonresidential investments - changes in business inventories

Examples of things that don't count towards a year's GDP

- things produced in previous years but sold that year - bonds sold by federal government - loans you take out - anything produced by a U.S. firm overseas - reselling of a house - sale of stocks -- BUT paying a broker to help you resell it DOES count

Which of the following would be counted in​ 2016's GDP? A. the value of a bond sold by the federal government B. the bonus check a stockbroker gets from​ his/her company in 2016 C. the value of a TV that was produced in 2015 but not sold until 2016 D. the value of a loan you take in 2016

B! The bonus check a stockbroker gets from​ his/her company in 2016 counts towards GDP.

Japanese plant in U.S. with mostly American workers -- how does this apply to GNP and GDP?

all of its output = U.S. GDP only, but not all goes towards GNP... wages of American workers = U.S. GNP profits of the company = Japanese GNP

Value Added

alternative way to calculate GDP: instead of just looking at the final products/services, add up the added value at every step of the production process

Personal Saving

amount of disposable personal income left after all spending

Nondurable Goods

don't last that long (clothes, food)

Nonresidential Investment

expenditure by firms on machines, tools, plants, etc.

Residential Investment

expenditures by households or firms on new houses/apartment buildings

Intermediate Good

goods produced by one firm for further processing for final product of another firm

Disposable Personal Income

household income AFTER taxes

Personal Income

household income BEFORE taxes -- amount they have to spend or save

Surplus of Government Enterprises

income of government enterprises (was negative in 2009)

Proprietors' Income

income of unincorporated business

Net Interest

interest paid by businesses (NOT households and government bc it is not assumed to flow from the production of goods and services)

Changes In Business Inventories

inventories = goods that a business produced now but will sell later (i.e. unsold goods)

Durable Goods

last relatively long time (cars, fridges)

GDP Deflator

measure of change in overall price level calculated by averaging the percent changes in bundled price using the 2 base years OR nominal GDP/real GDP * 100

Income Approach

method of computing GDP: add up income (wages, interest, rent, profits) received by all factors of income in producing final goods/services

Expenditure Approach

method of computing GDP: add up total amounts spent on all final goods/services

How to calculate real GDP using a base year

multiply the quantity of goods and services by their prices in the base year

How to calculate GDP deflator

nominal GDP/real GDP * 100

Receipts of factor income from the rest of the world refers to... Is it included in GDP?

payment for work that AMERICANS are doing abroad (not included in GDP)

Payments of factor income to the rest of the world refers to... Is it included in GDP?

payments we are making to foreign workers working in America (included in GDP)

Personal Savings Rate

percent of DISPOSABLE personal income that is saved important indicator of household behavior (save more during recessions)

Nominal Output

price of a good in that year * quantity produced

Retained Earnings of corporations

profits that don't go back to households through dividends

Size of each category of personal consumption

services = by far the largest, over 40% of total GDP nondurables = around double that of durables

How BEA now adjusts for inflation in real GDP

takes average ("split the difference") of the changes computed using the two base years (instead of just using one base year calculation)

Depreciation

the amount by which an asset's value falls over a given period of time

National Income

the total income earned by the factors of production owned by a country's citizens

Services (under personal consumption)

things we spend money on without physical product (doctor's visits, education, etc.)

Gross Private Domestic Investment (I)

total investment in capital (new housing, plants, inventory, equipment)n by private sector

GDP

total market value of a country's output: all FINAL goods and services PRODUCED in the country during a given time frame

Underground Economy

transactions that should be counted in GDP but aren't (drugs, prostitution, etc.)

Compensation of employees includes...

wages/salary AND supplements: social insurance, pension funds, etc. paid by firms or government LARGEST part by far

Fixed-Weight Procedure

way of finding real GDP by using a base year's prices

Current Dollars

current prices we pay for goods/services this is how GDP is measured

Indirect Taxes Minus Subsidies

basically net income of government (sales tax, customs duties, license fees)

Fixed Weight Indexes

become less accurate the farther in time they are from the base year