ECON2101 Ch. 15 & 16

In the actual economy, goods and services are purchased by...?

households, firms, and the government

If an economy's GDP falls, then it must be the case that the economy's...

...income and expenditure both fall

CPI overstates inflation by...

1% a year in the 1990s, but some improvements have reduced the overstatement of inflation

In the base year, the value of the consumer price index (CPI) is always:

100

In a simple circular-flow diagram, 1) households spend all of their income 2) all goods and services are bought by households 3) expenditures flow through the markets for goods and services, while income flows through the markets for factors of production 4) all of the above

4) all of the above

GDP deflator

A measure of price level calculated as the ratio of nominal GDP to real GDP times 100 GDP deflator = nominal GDP/real GDP x 100

CPI

Consumer Price Index A measure of the overall cost of goods and services bought by a typical consumer, computed and reported by the Bureau of Labor Statistics

Who calculates the CPI?

Bureau of Labor Statistics (BLS)

GDP deflator vs. CPI

GDP deflator: -goods produced domestically -currently produced goods CPI: -goods and services bought by consumers -fixed basket of goods and services

Personal income

Income households and noncorporate businesses receive National income minus retained earnings, indirect business taxes, corporate income taxes, and contributions to social insurance. Includes interest income from gov, income from gov transfer programs

Disposable personal income

Income that households and noncorporate businesses have left after satisfying their obligations to the government Personal income minus personal taxes and certain nontax payments (such as traffic tickets)

Inflation rate calcuation

Inflation rate in yr 2 = (CPI yr 2 - CPI yr 1)/CPI yr 1 x 100

Inflation rate

Percentage change in the price level from one period to another

Real interest rate =

Real interest rate = nominal interest rate - inflation rate

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time Y = C + I + G + NX Remember: purchases of housing is investment Includes production of foreigners working in the U.S. but excludes production by U.S. residents working in foreign countries

Gross National Product (GNP)

Total income earned by a nation's permanent residents. Differs from GDP by including income our citizen earn abroad and excluding income foreigners earn here.

Net National Product (NNP)

Total income of a nation's residents (GNP) minus losses from depreciation

Both the market value of rental housing services and the market value of owner-occupied housing services are included in GDP. T/F

True

Are Social Security benefits and federal income tax brackets indexed?

Yes.

Amount in today's dollars =

amount in year T dollars x (price level today/price level in year T)