Macroeconomics Exam 2

National Income and Product Accounts (NIPA)

-Lets economists judge our nation's economic performance, compare U.S income and output to that of other nations, and track the economy's condition over the course of the business cycle.

Peak

-Usually means that the economy is operating at its capacity. -Followed by downturns or recession.

What is included in the NIPA and not the circular flow diagram?

-government and foreign purchases of goods and services. -spending made by businesses on investment goods.

Leading Economic Index (LEI)

-monthly statistical series that uses a combination of ten individual indicators to forecast changes in real GDP. -predicts a recession whenever the index falls for three months in a row.

National Bureau of Economic Research (NBER)

-non profit research organization founded in 1920 that officially dates business cycles. -they date peaks and troughs only after the fact. -a committee of economists date the turning points. -they help form expectations of how the economy might perform based on the phase of the business cycle it has reached. -focuses on historical data to date phases of business cycles after they occur.

How can the National Income and Product Accounts (NIPA) be found?

1. By adding up the income in the economy. 2. By adding up spending.

What are the three categories that goods are services are divided into?

1. Durable goods 2. Nondurable goods 3. Services

What are the four phases of a business cycle?

1. Peak (sometimes called a boom) 2. Recession or Downturn 3. Trough 4. Recovery (an expansion to another peak)

What are the methods used to predict business cycle movements?

1. national activity index 2. leading economic index 3. yield curve

What are the four categories of spending?

1. personal consumption expenditures 2. gross private domestic investment (GPDI) 3. government spending 4. net exports (exports minus imports)

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. -Officially ends when the economy is at the trough.

Double-Dip Recession

A recession that begins after only a short period of economic recovery from the previous recession.

Bill

A type of bond with a maturity of less than one year.

Expenditures (Spending) Approach to Calculate GDP

All spending on final goods and services is added together.

Services

Are commodities that cannot be stored and are consumed at the time and place of purchase. -legal, barber, and repair services.

Durable goods

Are products that have an average useful life of at least three years. -automobiles, major appliances, books, and musical instruments.

What role do businesses serve in a circular flow diagram?

Businesses use this labor (and other inputs) to produce goods and services that are supplied to the product market. -In the end these products find their war back into households through consumer purchases. -Businesses pay for inputs (factors) of production: land, labor, capital, and entrepreneurship..

In a circular flow diagram, what do the arrows pointing counterclockwise represent?

Flows of money.

Personal Consumption Expenditures

Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.

What do nonresidential structures include?

Hotels, motels, manufacturing plants, mine shafts, oil wells, fast food restaurants, etc.

What role do households serve in a circular flow diagram?

Households supply labor (and other inputs or factors of production) to the resource market.

Circular Flow Diagram

Illustrates how households and firms interact through product and resource markets. -Shows that economic aggregates can be determined by examining either spending flows or income flows to households. -Shows how business and households interact through the product and resource markets. -Consists of households, businesses, product market, and resource market.

Nondurable goods

Include all other tangible goods that should be thrown out before they are three years old. -underwear, toothbrushes, sodas, frozen pizza.

Gross Domestic Product (GDP)

Is equal to the total market value of all final goods and services produced by resources in a given year. -is a measure of the economy's total output. -reflects the final value of goods and services produced. -measurements don't include the value of intermediate goods used to produce other products. This distinction helps prevent what economists call "double counting". -Does not include goods or services produced abroad. -Does not matter whether the producers are American citizens or foreign nationals as long as the production takes place within the country's borders.

What are the inputs (factors) of production?

Land, labor, capital, and entrepreneurship. -Factors are paid by rents, wages, interest, and profits. -These payments become income for the economy's households, which use these funds to purchase goods and services in the product market.

What does the NIPA focus on?

NIPA accounts focus on market-produced goods and services. -Exceptions to this approach include substituting payroll costs for the value of government services and estimating (imputing) the rental value of owner-occupied housing.

Trough

Occurs when the economy is at its worst (or near its worst) condition.

"Change in Inventories"

Refers to a change in the physical volume of the inventory a private business owns, valued at the average prices over the period.

Gross Private Domestic Investment (GPDI)

Refers to fixed investments in such things as structures (residential and nonresidential), equipment, and software, and changes in private business inventories.

Gross National Product (GNP)

Reflects the market value of all goods and services produced domestically and abroad using resources supplied by U.S citizens. -Excludes the value of goods and serviced produced in the U.S by foreign owned businesses.

How much of the GPDI does residential and nonresidential structures make up?

Residential housing = 1/5 of GPDI Nonresidential = 4/5 of GPDI

Yield Curve

Shows the relationship between the interest rate earned on a bond (measured on the vertical axis) and the length of time until the bond's maturity date (shown on the horizontal axis).

How are business cycles measured?

The duration and intensity of business cycles are measured using data collected by the Bureau of Economic Analysis and U.S Department of Labor. -data for aggregate income and output come from the national income and product accounts.

What do goods and services become in a circular flow diagram?

They become sales revenues for the business sector.

National Activity Index

a weighted average of 85 indicators of economic activity -when the index is a zero value, the economy is growing at its historical trend rate of growth. -positive values of the index indicate that it's growing faster than its long term trend. -these indicators are drawn from economic activity including: production, income, employment, unemployment, hours worked, personal consumption, housing, sales, orders, inventories.

Business Cycles

alternating increases and decreases in economic activity that are typically punctuated by periods of recession and recovery -short run fluctuations in the macroeconomy. -tends to have an upward long-run trend in most countries, indicating a growing economy over time. -they vary in duration, time, and speed.

What's counted as fixed investments?

improvements to existing business structures and new construction