Chapter 4 - Measuring GDP and Economic Growth

Aggregate expenditure is equal to

consumption expenditure + investment + government expenditure + net exports its the sum of the red flow

Net domestic income at domestic prices is a...

net income measure because corporate profits are measured after deducting depreciation; thus a net income measure

Aggregate Expenditure (sum of red flow)

sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services

The factor incomes sum to...

net domestic income at factor cost, which is the cost of the factors of production used to produce final goods

If net exports are positive

the net flow is from US firms to the rest of the world

If net exports are negative

the net flow is from the rest of the world to US firms

Aggregate income is equal to

the total amount paid for the services of the factors of production used to produce final goods and services - wages, interest, rent and profit blue flow shows income

Real GDP

the value of final goods and services produced in a given year when valued at the prices of a reference base year; reveals the change in production

Nominal GDP (precise name for GDP)

the value of final goods and services produced in a given year when valued at the prices of that year

Economists use estimates of real GDP for two main purposes:

to compare the standard of living over time to compare the standard of living across countries

Gross investment

total amount spent both buying new capital and replacing depreciated capital one of the expenditures included in the expenditure approach to measure GDP; the result value of total product is gross measure

A recession ends and the next expansion begins at the...

trough (a temporary low point)

To isolate the increase in production from the rise in prices...

we distinguish between real GDP and nominal GDP

Our standard of living rises...

when our incomes rise and afford to buy more goods and services BUT we must produce more goods and services

Domestic

within a country opposite: national

GDP can be measured in 2 ways

1) by the total EXPENDITURE on goods and services 2) by the total INCOME earned producing goods and services

Two problems arise in using real GDP to compare living standards across countries...

1) the real GDP is one country must be converted into the same currency units as the real GDP of the other country 2) the goods and services in both countries must be valued at the same prices

Imports

A country buying goods and services from the rest of the world Negative entry in calculating US GDP

Exports

A country selling goods and services to the rest of the world Positive entry in calculating US GDP

Environmental Quality

Burning oil and coals brings global warming and climate change. Resources used to protect the environment are valued as part of GDP.

Government expenditure

Governments buy goods and services from firms

Produced within a country

E.G Nike, a U.S firm, produces sneakers in Vietnam, and the market value of those shoes is part of Vietnam's GDP, not the USA. Toyota, a Japanese firm, produces cars in Kentucky. This value of production is part of US' GDP, not Japan's.

Every cycle has two phases and turning points:

Expansion and Recession (recovery) Peak and Trough

GDP is equal to ...

Expenditure(action of spending funds), which equals to income

In a given time period

GDP measures the value of production in a given time period.. normally either a quarterly (4x a year) (quarterly GDP data) or yearly (annual GDP data)

To determine what goods have the greatest production in terms of market value...

GDP values items at their market value... price at which items are traded in markets. E.G. A- 100 apples, 50 oranges, or B - 50 apples and 100 oranges??? If price of apple is 10 cents, then market value of 50 apples is $5 If price of orange is is 20 cents, then market value of 100 oranges is $20... So market value of B is greater than A

4 parts of GDP (gross domestic product)

Market Value Final goods and services Produced within a country In a given time period

Real GDP per person is

Real GDP divided by the population; tells us the value of goods and services that the average person can enjoy

The Circular Flow of Expenditure and Income

Shows total income (AGGREGATE INCOME)... received by households included retained earnings, as the blue flow labeled Y Firms sell and households buy consumer goods and services in goods markets. The total payment for these goods and services is CONSUMPTION EXPENDITURE labeled by red flow C Firms buy and sell new capital equipment (computer systems, airplanes, trucks, and assembly line equipment). The purchase of new plant, equipment and buildings and the addition of inventories are INVESTMENT, shown by red flow I

Two features of expanding living standard

The growth of potential GDP per person Fluctuations of real GDP per person

Net exports

The value of exports (X) minus the value of imports (M)

Gross profit

a firm's profit before subtracting depreciation one of the incomes included in the income approach to measure GDP so the resulting value of total product is a gross measure

Subsidy

a payment by the government to a producer

Recession (recovery)

a period during which real GDP decreases - its growth rate is negative - for at least two successive quarters

Expansion

a period during which real GDP increases

Double counting

a problem that consist of "counting" both value of intermediate goods and services and final goods and services. However, the value of a truck already includes the value of the intermediate good (tires) The value of iPad already includes the value of the chip

To get from net domestic income to gross income

add depreciation

To get from factor cost to market price...

add indirect taxes and subtract subsidies to get net domestic income at market prices

Final Goods and Services

an item bought by its final user during a specified time period. to calculate GDP, we value the final goods and services produced. - contrasts with an intermediate good (or service), which is an item that is produced by one firm, bought by another firm and used a component of a final good or service. Ford truck - final good Firestone tire on the truck - intermediate good iPad - final good Apple A5X chip inside - intermediate good

with Real GDP, we can remove...

any influence that rising prices and a rising cost of living might have had on our comparison

Gross

before subtracting the depreciation of capital opposite: net (after subtracting the depreciation of capital)

An expansion ends and recession begins at the....

business cycle peak (highest level)

One method of comparing the standard of living over time is to...

calculate real GDP per person in different years.

Net interest, rental income, corporate profits, and proprietors' income are earned by...

capital and land

Leisure Time

economic good that adds to our economic well-being and the standard of living but not GDP. Only our working time is part of GDP

Market price includes indirect taxes so...

exceeds factor cost

Gross expenditure on goods and services

expenditure by all levels of government such as national defense and garbage collection does NOT include transfer payments (unemployment benefits) because they are NOT expenditures on goods and services

Gross private domestic investment

expenditure on capital equipment and buildings by firms and the additions to business inventories. includes purchase of new homes

Personal consumption expenditures

expenditures by US households on goods and services produced in the U.S and in the rest of the world. this includes goods, like soda, books and services such as banking and legal advice includes purchase of consumer durable goods, like TVs and microwave owns does NOT include the purchase of new homes (goes under investments)

Net exports of goods and services

export - import; includes values of airplanes that Boeing sells to British airaways (US export), the value of Japansese DVDs players that Best Buy purchases from Song (US import)

Subsidies make market price less than...

factor cost

Total expenditure is a...

gross number because it includes gross investments

Household production is not part of GDP because....

household activities such as preparing meals, changing a light bulb and cutting grass and caring for a child cannot be traded in market

Some of the factors that influence the standard of living and that are not part of GDP are...

household production underground economic activity leisure time environmental quality

Growth of Potential GDP

maximum level of real GDP that can be produced while avoiding shortages of labor, capital, land and entrepreneurial ability grows at a steady pace because the quantities of the factors of production and their productivity grow at a steady pace does not grow at a CONSTANT pace

The expenditures on final goods are valued at market prices because...

of indirect taxes and subsidies

Underground Economy

part of the economy that is purposely hidden from the view of government to avoid taxes and regulations or because the goods and services being produced are illegal because this activity is unreported, it is omitted from GDP

Compensation of employees (blue flow)

payment for labor services includes net wages and salaries (take home pay) that workers receive plus tax withheld on earnings plus fridge benefits such as Social Security and pension fund contributions

As expansion progresses...

potential GDP grows and real GDP eventually exceeds potential GDP

In the early stage of an expansion...

real GDP returns to potential GDP

Indirect tax

sales tax or a tax on gasoline

Purchasing power parity

same prices for both countries

Aggregate Income (sum of blue flow)

summing the incomes that firms pay households for the services of the factors of production they hire (wages for labor, interests for capital, rent for land, and profit for entrepreneurship)

Governments finance their expenditure with...

taxes and make financial transfers to households, such as Social Security benefits and unemployment benefits, and pay subsidies to firms (not part of circular flow of expenditure and income though)

The omission of household production from GDP means...

that GDP underestimates total production and the growth rate of GDP overestimates the growth rate of total production

Net investment

the amount by which the value of capital increases

Real GDP Fluctuations

the business cycle; a periodic but irregular up-and-down movement of total production and other measures of economic activity

Depreciation

the decrease in the value of a firm's capital that results from wear and tear and obsolescence

Statistical discrepancy

the gap between the income and expenditure of GDP; is NEVER large

GDP (gross domestic product)

the market value of the final goods and services produced within a country in a given time period. measure the value of total production; can measure this value by the total income earned producing GDP or the total expenditure on GDP; shows direct link between PRODUCTIVITY and LIVING STANDARDS