EC 101 Chapter 27

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compute DI (disposable income)

disposable income = personal income after personal taxes have been paid measures the amount of income available to households to consume or save

net private domestic investment

gross private domestic investment less consumption of fixed capital; the addition to the nation's stock of capital during a year

Explain what is meant by the underground economy and state its approximate size in the United States and how that compares to other nations.

illegal income or income not reported correctly is the underground economy - relatively small in the US compared to others because of regulations, taxation and enforcement of laws

List the components of GDP in the income or allocations approach.

income = wages + rents + interest + profits + statistical adjustments

Explain why changes in inventories are investments.

increases in inventories (unsold goods) are consider to be investment because they represent, in effect, unconsumed output. non consumed output is, by definition, capital

durable goods

goods not for immediate consumption and able to be kept for a period of time.

multiple counting

wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once

Services

An (intangible) act or use for which a consumer, firm, or government is willing to pay.

consumption of fixed capital

An estimate of the amount of capital worn out or used up (consumed) in producing the gross domestic product; also called depreciation.

Compute GDP using either the expenditure approach when given national income data.

C+Ig+G+Xn Sum of personal consumption expenditures (C) + Gross private domestic investment (Ig) + government purchases (G) + net exports (Xn) = GDP

gross private domestic investment (Ig)

Expenditures for newly produced capital goods (such as machinery, equipment, tools, and buildings) and for additions to inventories.

Real GDP

GDP adjusted for inflation; GDP in a year divided by the GDP price index for that year, the index expressed as a decimal

Nominal GDP

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation

Calculate a GDP price index using simple hypothetical data.

GDP price index is the nominal GDP divided by the real GDP

Net Domestic Product (NDP)

Gross domestic product less the part of the year's output that is needed to replace the capital goods worn out in producing the output; the nation's total output available for consumption or additions to the capital stock.

Differentiate between gross and net investment

Gross investment is all investment goods - includes investment in replacement capital AND in added capital Net investment is gross investment - depreciation

Give an estimate of actual 2014 (or later) U.S. GDP in trillions of dollars and be able to rank the United States relative to a few other countries.

Highest GDP's are Us, China and Japan - US is highest with 17 trillion

Compute NDP (net domestic product)

NDP = GDP less the consumption of fixed capital

Compute NI (national income)

National Income = total income earned by a nations resource suppliers plus taxes on production and imports Found by subtracting statistical discrepancy from NDP and adding net foreign factor income to NDP

Find real GDP by adjusting nominal GDP with use of a price index.

Real GDP = nominal GDP divided by price index (in hundredths)

gross output (GO)

The dollar value of the economic activity taking place at every stage of production and distribution. By contrast, gross domestic product (GDP) only accounts for the value of final output.

Value Added

The value of the product sold by a firm less the value of the products (materials) purchased and used by the firm to produce the product.

national income

Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors' income, and such taxes.

Discuss the relationship between net investment and economic growth.

When gross investment exceeds depreciation, net investment is positive and the nation's stock of capital rises.

taxes on production and imports

a national income accounting category that includes such taxes as sales, excise, business property taxes, and tariffs which firms treat as costs of producing a product and pass on (in whole or in part) to buyers by charging a higher price

price index

an index number showing the extent to which a weighted average price, or a ' market basket' of goods, has changed over time relative to its price in a specific base year

Compute GDP using income approach when given national income data.

compensation of employees + rents + interest + proprietor's income + corporate profits + taxes on production and imports = national income national income - net foreign factor income + compensation for fixed capital + statistical discrepancies = GDP

Gross Domestic Product (GDP)

defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time - typically a year

government purchases (G)

expenditures by government for goods and services that government consumes in providing public services as well as expenditures for publicly owned capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and final services

net exports (Xn)

exports minus imports

List seven shortcomings of GDP as an index of social welfare.

fails to account for -nonmarket and illegal transactions - changes in leisure -changes in product quality -composition and distribution of output -environmental affects of pollution -economic activity at earlier stages of production and distribution

national income accounting

measures the economy's overall performanc operates in much the same way for an economy as a whole

State the purposes of national income accounting

measures the economy's overall performance - it does for the economy as a whole what private accounting does for the individual firm or household -assesses health of economy -track long-run course (grown, constant, decline) -formulate policies that will safeguard and improve the economy's health

List the components of GDP in the output (expenditures) approach

output or expenditures approach = consumption expenditures by households + investment expenditures by business + government purchases of goods and services + expenditures by foreigners

Compute PI (personal income)

personal income = total income paid to households prior to any allowance for personal taxes

Disposable Income (DI)

personal income less personal taxes; income available for personal consumption expenditures and personal saving

final goods

products that are purchased by their end users

intermediate goods

products that are purchased for resale or further processing or manufacturing

Personal Income (PI)

the earned and unearned income available to resource suppliers and others before the payment of personal taxes

personal consumption expenditures (c)

the expenditures of households for both durable and and non durable consumer goods

The expenditures approach to calculating GDP

the method that adds all expenditures made for final goods and final services to measure the gross domestic product

Income Approach to GDP

the method that adds all the income generated by the production of final goods and services to measure the GDP

base year

the year with which other years are compared when constructing an index; for example, the base year for a price index

nondurable goods

those goods that last a short period of time, such as food, light bulbs, and sneakers

Describe the system represented by the circular flow in this chapter when given a copy of the diagram.

three sectors - households, govt, business,


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