EC 101 Chapter 27
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,