Macro ch 23

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction?

Net exports fall, while GDP is unchanged

True or false: GDP includes goods and services currently produced. It does not include transactions involving items produced in the past.

TRUE...When Ford produces and sells a new car, the value of the car is included in GDP. But when one person sells a used car to another person, the value of the used car is not included in GDP.

intermediate good

When International Paper makes paper, which Hallmark then uses to make a greeting card, the paper... value of intermediate goods is already included in the prices of the final goods. Adding the market value of the paper to the market value of the card would be double counting. That is, it would (incorrectly) count the paper twice.

Residential capital includes...

.....the landlord's apartment building and a homeowner's personal residence. By convention, the purchase of a new house is the one type of household spending categorized as investment rather than consumption.

Business capital includes...

....business structures (such as a factory or office building), equipment (such as a worker's computer), and intellectual property products (such as the software that runs the computer)

transfer payments

...when the government pays a Social Security benefit to a person who is elderly or an unemployment insurance benefit to a worker who was recently laid off, the story is very different they are not made in exchange for a currently produced good or service. Transfer payments alter household income, but they do not reflect the economy's production. (From a macroeconomic standpoint, transfer payments are like negative taxes.) Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are not counted as part of government purchases.

If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as ____ hamburgers.

15 hamburgers (2 x 30= 60/4)

Define real GDP and nominal GDP. Which is a better measure of economic well-being? Why?

Real GDP is a better measure of economic well-being because changes in real GDP reflect changes in the amount of output being produced. Thus, a rise in real GDP means people have produced more goods and services, but a rise in nominal GDP could occur either because of increased production or because of higher prices

If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs?

Real GDP rises by 10%, while nominal GDP is unchanged

True or false: Items are included in a nation's GDP if they are produced domestically, regardless of the nationality of the producer.

TRUE...When a Canadian citizen works temporarily in the United States, her production is part of U.S. GDP. When an American citizen owns a factory in Haiti, the production at her factory is not part of U.S. GDP. (It is part of Haiti's GDP.)

final good

The Hallmark card as a product... GDP includes only the value of final goods. additions to inventory add to GDP, and when the goods in inventory are later used or sold, the reductions in inventory subtract from GDP.

statistical discrepancy

The difference between the two calculations of GDP.

Which of the following does NOT add to U.S. GDP?

The federal government sends a Social Security check to your grandmother. Example: transfer payment

recessions

The upward climb of real GDP is occasionally interrupted by periods during which GDP declines

Y = C + I + G + NX

This equation is used to understand how the economy is using its scarce resources, economists study the composition of GDP among various types of spending. To do this, GDP (which we denote as Y) is divided into four components: consumption (C), investment (I), government purchases (G), and net exports (NX):

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP/real GDP X 100 The GDP deflator is one measure that economists use to monitor the average level of prices in the economy and thus the rate of inflation. The GDP deflator gets its name because it can be used to take inflation out of nominal GDP—that is, to "deflate" nominal GDP for the rise that is due to increases in prices.

identity (Y = C + I + G + NX)

an equation that must be true because of how the variables in the equation are defined. In this case, because each dollar of expenditure included in GDP is placed into one of the four components of GDP, the total of the four components must be equal to GDP.

Government purchases

include spending on goods and services by local, state, and federal governments. It includes the salaries of government workers as well as expenditures on public works. Recently, the U.S. national income accounts have switched to the longer label government consumption expenditure and gross investment, but in this book, we will use the traditional and shorter term government purchases.

Personal income

is the income that households and non corporate businesses receive. Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners. It also subtracts indirect business taxes (such as sales taxes), corporate income taxes, and contributions for social insurance (mostly Social Security taxes). In addition, personal income includes the interest income that households receive from their holdings of government debt and the income that households receive from government transfer programs, such as welfare and Social Security.

Disposable personal income

is the income that households and noncorporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain nontax payments (such as traffic tickets).

Investment

is the purchase of goods (called capital goods) that will be used in the future to produce more goods and services. Investment is the sum of purchases of business capital, residential capital, and inventories.

Gross national product (GNP)

is the total income earned by a nation's permanent residents (called nationals). It differs from GDP in that it includes income that our citizens earn abroad and excludes income that foreigners earn here.

National income

is the total income earned by a nation's residents in the production of goods and services. It is almost identical to net national product. These two measures differ because of the statistical discrepancy that arises from problems in data collection.

Net national product (NNP)

is the total income of a nation's residents (GNP) minus losses from depreciation

Depreciation

is the wear and tear on the economy's stock of equipment and structures, such as trucks rusting and old computer models becoming obsolete. In the national income accounts prepared by the Department of Commerce, depreciation is called the "consumption of fixed capital."

Why should policymakers care about GDP?

most credible indicator of how much the economy expanded in a quarter or year. However, policy makers should not take the GDP figures at face value and they should not focus entirely on economic expansion alone.

inflation

overall price rising The GDP deflator is one measure that economists use to monitor the average level of prices in the economy and thus the rate of inflation. The GDP deflator gets its name because it can be used to take inflation out of nominal GDP—that is, to "deflate" nominal GDP for the rise that is due to increases in prices.

What are two things GDP can measure?

the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.

When GDP grows rapidly...then....

then.....these other measures of income usually grow rapidly (1) the economy is producing a larger output of goods and services, or (2) goods and services are being sold at higher prices. When studying changes in the economy over time, economists want to separate these two

When GDP falls...then....

then...these other measures usually fall as well.

seasonal adjustment

when the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure. The unadjusted data show clearly that the economy produces more goods and services during some times of the year than during others. (As you might guess, December's holiday shopping season is a high point.) When monitoring the condition of the economy, economists and policymakers often want to look beyond these regular seasonal changes.

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here?

$80 (2 x40) GDP is market value of all FINAL goods and services produced

List the four components of expenditure. Which is the largest?

(1) consumption; (2) investment; (3) government purchases; and (4) net exports. The largest component is consumption, which accounts for more than two-thirds of total expenditure.

Which contributes more to GDP—the production of a pound of hamburger or the production of a pound of caviar? Why?

?

True or false: GDP includes both tangible and and intangible goods

TRUE... Ex: Concert and CD

Consumption

is spending by households on goods and services, with the exception of purchases of new housing.

real GDP

shows how the economy's overall production of goods and services changes over time.

GDP (Gross Domestic Product)

the market value of all final goods and services produced within a country in a given period of time

Which is the largest component of GDP?

Consumption

Net exports

equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports). A domestic firm's sale to a buyer in another country, such as Boeing's sale of an airplane to British Airways, increases net exports. refers to the fact that imports are subtracted from exports. when a domestic household, firm, or government buys a good or service from abroad, the purchase reduces net exports, but because it also raises consumption, investment, or government purchases, it does not affect GDP.