Chapter 22

Bond (630)

Borrowing in the form of an IOU that pays interest.

VAT tax ***

Value added tax

Depreciation

Value of the existing capital stock that has been consumed or used in the production process. Ex) Computer value goes down after time.

Coca-Cola builds a new bottling plant in the United States: is this transaction include in GDP for the United States? ***

When Coca-Cola builds a new bottling plant, it is investment spending and included in GDP.

Nominal GDP equals: ***

real GDP in the base year.

How can GDP be calculated? ***

1) Add up the value added by all firms 2) Add up all spending on domestically produced final goods and services, an amount equal to aggregate spending: GDP = C + I + G + (X -IM) 3) Add up all factor income paid by domestic firms to factors of production: GDP = Compensation of employees + proprietor's income + rental income + corporate profits + interest + depreciation + indirect business taxes. You either add all spending or income in the economy.

Omissions from GDP - output driven measure ***

1) Non Marketed goods and services (eg; household production, stay at home mom) value but not capture 2) Illegal activities (ex illegal gambling) 3) Value of leisure 4) Transfer payments: someone gives you grant to think about new piece of music but not producing anything 5) Payments to recipients who have not earned them through the sale of their production factors and who have not supplied current goods or services in exchange for these payments (eg subsidies, grants from the government)

How do we measure Inflation? ***

1) Price Index: Shows the cost of buying the same market basket "bundle" of goods in different years as a percentage of its cost in some base year. Broad measure. 2) Consumer price index (CPI): Measures the level of consumer prices paid by households over time. A specific price index showing clothing, food etc. Narrow Measure. 3)Producer Price Index, could also show clothing, food, and housing. Would not show commodity like raw steel in CPI.

Market Basket (644)

A hypothetical set of consumer purchases of goods and services.

Aggregate Price Level (644)

A measure of the overall level of prices in the economy. Changes in the aggregate price level are measured by the cost of buying a particular basket during different years.

Stock (630)

A share in the ownership of a company held by a shareholder.

GDI (income)

Approximate sum of all income earned by factors of production.

GDP = C + I + G + (X-M) ***

C = personal consumption expenditures (what we buy) I = investment spending (buying something used in future like a house or car). Long term keep for awhile. G = government purchases (including federal, state, and local governments like salary of government workers and public projects) X-M = Net exports (Can be positive or negative depending on the year or country) M-X = Foreign Savings, US in deficits X - Exports M - Imports

Why the GDP deflator maybe a better measure of inflation than the CPI? ***

CPI includes only the consumer. The GDP deflator has a wider variety of goods in its basket than the CPI.

Inventory Investment

Change in the value of inventory stocks.

Why does the analysis of the growth rate of aggregate output must use real GDP? ***

Doing so eliminates any changes in the value of aggregate output due solely to price changes.

Private Savings (631)

Equal to disposable income minus consumer spending, is disposable income that is not spent on consumption.

Disposable Income (630)

Equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption and to save. Allocated to consumer spending and private savings.

How do households allocate disposable income between consumer spending and private savings?

Funds that flow into the financial markets, financing investment spending, and any government borrowing.

Real GDP per Capita (641) ***

GDP divided by the size of the population; it is equivalent to the average GDP per person. It is a measure of the average aggregate output per person. But it is not a sufficient measure of human welfare, nor is it an appropriate goal in itself, because it does not reflect important aspects of living standards within an economy. The best measure of living standards.

Why GDP measures may tend to overstate the GDP of rich countries relative to poor countries? ***

GDP overstates the advantage of rich countries over poor countries because of the greater use of nonmarket goods and services in poor countries.

NNP (Net National Product) ***

GNP - Depreciation.

Imports (IM) (632)

Goods and services purchased from other countries. Leads to a flow of funds out of the country.

Exports (X) (632)

Goods and services sold to other countries. Leads to a flow of funds into the country. Foreigners can also buy stocks and bonds in the US financial markets.

Final Goods and Services (633)

Goods and services sold to the final, or end, user. Final and Ready to use. Ex) Pen (includes intermediate goods, ink). purchased for final use by consumers or businesses. Avoid double counting. (Located in country).

Intermediate Goods and Services (633) ***

Goods and services-bought from one firm by another firm-that are inputs for production of final goods and services. Not included in the calculation of GDP. Goods which goes into production of other good. Ex) Ink Alone. Used to produce other goods.

A corporation gives a grant to a musician: how does this transaction enter into the GDP? ***

Grant does not enter into GDP. It counts as a transfer payment.

What does GDP not capture? ***

Household incomes Illegal Activity Transfer Payments Value of Leisure

Consumer Spending (C) (630)

Household spending on goods and services.

Delta sells one of its existing airplanes to Korean Air: is this transaction include in GDP for the United States? ***

If Delta sells one of its airplanes to Korean Air, this transaction is not included in GDP because it does not represent production during the current time period. The airplane would have been included in GDP when it was produced; now it is just a sale of a used item.

A California winery produces a bottle of Chardonnay and sells it to a customers in Montreal, Canada: is this transaction include in GDP for the United States? ***

If a California winery sells a bottle of Chardonnay to a customer in Montreal, it is a U.S. export and is entered as such in U.S. GDP.

A book publisher produces too many copies of a new book; the books don't sell this year, so the publisher adds the surplus books to inventories: is this transaction include in GDP for the United States? ***

If a book publisher produces too many copies of a new book and the books do not sell in the year they are produced, the publisher adds the surplus books to inventories. These books are considered investment spending and added to GDP. It is as if the publisher bought the books itself.

Why are the three measures of GDP equivalent? ***

In the economy as a whole, total income paid by domestic firms to factors of production must equal total spending on domestically produced final goods and services.

How do households receive factor income/earn income?

In the form of factor markets from wages, profit from ownership of stocks, interest paid on bonds, and rent on land and structures. They also receive government transfers.

Jackie, a Canadian citizen, works only in the US. The value of the output she produces is included in US GDP, UD GNP, or both? ***

Included in US GDP, but it is not included in US GNP.

Fixed Investment

Investment in plant, structures and equipment.

National Income and Product Accounts (National Accounts) (630)

Keep track of the flows of money between different sectors of the economy.

GNP (Gross National Product) ***

Measure of output. Final output produced by US residents whether in the US or abroad. In contrast, GDP includes goods and services produced by labor and capital in the United States, whether or not suppliers are residents of the United States. Final product created by American National - GNP. Ex) Can be US Company in Greece.

GDP Deflator (646) ***

Measures the aggregate price level as 100 times the ratio of nominal GDP to real GDP in that year. Measures the level of prices of all final goods and services (consumer goods, investment goods, and government) produced by the economy.

Producer Price Index (PPI) (646)

Measures the changes in the prices of goods purchased by producers/used as inputs by firms.

Price Index (644)

Measures the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year.

Consumer Price Index (CPI) (645)

Measures the cost of the market basket of a typical urban American family. The most commonly used price index.

National income ***

NNP - indirect business taxes (= payments made to all factors)

Would Services of a homemaker be included in the GDP? ***

No

A circumstance in a given year for a given country when GNP and GDP would be the same ***

No foreigners produce here and no residences produce overseas.

Government Transfers (630)

Payments by the government to individuals for which no good or service is provided in return.

Purchasing Power Parity (PPP) ***

Rate for converting one economy's output into the prices of another country. It is the exchange rate between two currencies that equates the real buying power of both currencies. Ex) Dollar goes farther in Mexico, Big Mac Index, cost around the world, Compensation plane crash victims unequally.

When inflation is positive, the average price of a market basket of goods and services is: ***

Rising.

A Minnesota Farmer buys a new tractor made in Iowa, by a German company. What happens to US investment, US GDP, and German GDP?

So, US investment and GDP increase but German GDP is unaffected.

Investment Spending (I) (632)

Spending on productive physical capital-such as machinery and construction of buildings-and on changes to inventories.

Inventories (632) ***

Stocks of goods and raw materials held to facilitate business operations. Included in the calculation of GDP.

Financial Markets (631)

The banking, stock, and bond markets, which channel private savings and foreign lending into investment spending, government borrowing, and foreign borrowing. Via the financial markets, private savings and foreign lending are channeled to investment spending, government borrowing, and foreign borrowing.

Net Exports (638) ***

The difference between the value of exports and the value of imports. Included in the calculation of GDP.

Aggregate Output (640) ****

The economy's total quantity of output of final goods and services. To determine the actual growth, we calculate real GDP using prices from some given base year.

Chained Dollars (641)

The method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year. US statistics on real GDP are always expressed in chained dollars.

Inflation Rate (645) ***

The percent change per year in a price index- typically the consumer price index. The rate at which the price level (measured by a price index) is changing. Need some type of bundle of goods to track over time.

Aggregate Spending (633)

The sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports, is the total spending on domestically produced final goods and services in the economy.

Government Borrowing (632)

The total amount of funds borrowed by federal, state, and local governments in the financial markets.

Real GDP (640) ***

The total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year. In the base year, real GDP is not the same as nominal GDP, the value of aggregate output calculated using current prices. Real GDP removes the effect of rising prices on normal. If you don't take out effect of inflation, you'll get wrong image looking at ex) making the same 1,000 cars for next year.

Gross Domestic Product (GDP) (633) ***

The total value of all final goods and services produced in the economy during a given year. It does not include the value of intermediate goods and services, but it does include inventories and net exports (X-IM). Market value of all final goods and services produced by the factors of production located in the country during a year. Owner doesn't matter, if located in USA then goes into the count to GDP. GDP includes only final goods.

Nominal GDP (641) ***

The value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced.

Value Added of a Producer (635) ***

The value of its sales minus the value of its purchases of intermediate goods and services. Total Sales (All industries) - purchases (ie the sum of the value added of all industries) Net output/value added: value of industry output minus the value of purchases from other industries. Pizza company - $ spent on box company.

Government Purchases of Goods and Services (G) (632)

Total expenditures on goods and services by federal, state, and local governments. Paid for by tax revenues and any government borrowing.

An American buys a bottle of French perfume in Tulsa: is this transaction include in GDP for the United States? ***

When an American buys a bottle of French perfume, it is a consumption expenditure as measured by GDP. But since it does not represent production in the United States, it is also deducted from GDP as an import. The net effect of the transaction does not change GDP in the United States.

Ms. Moneybags buys an existing share of Disney stock: is this transaction include in GDP for the United States? ***

When an individual buys an existing share of stock, the transaction is not included in GDP because there is no production.

A corporation makes payment to an employee: how does this transaction enter into the GDP? ***

When the employee is paid, it enters into GDP flow.

Would A newly built house be included in the GDP? ***

Yes

Would Maid Service be included in the GDP? ***

Yes

Would Salary of the president of the US be included in the GDP? ***

Yes

Would Services of a house painter be included in the GDP? ***

Yes