Chapter 25

Price Index

A measure of the price of specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. Equal to: Price of Market Basket in specific year (/) Price of same Market Basket in base year (*) 100

GDP Formula

C + IG + G + XN

Gross Domestic Product

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; measures the value of output (product) in monetary terms; includes only the market value of final goods and ignores intermediate goods in order to avoid counting components each time.

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.

Gross Private Domestic Investment "Ig"

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

Net Exports "Xn"

Exports (-) Imports

Nominal GDP

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

Net Domestic Product

GDP minus 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. GDP adjusted for depreciation.

Non-productive transactions

Good and services that must be excluded from GDP because they have nothing to do with the generation of final goods

Real GDP

Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal. Equal to: Nominal GDP (/) Price index (in hundredths)

Disposable Income "DI"

Personal income minus personal taxes; income available for personal consumption expenditures and personal saving.

Final Goods

Products that are purchased by their end users; already contain the intermediate goods.

No Second Hand Sales

Selling one piece of material after owning it. Because this transaction generates no new current production, it is not documented in GDP

Stock & Bond Transactions

The buying and selling of stocks and bonds is just a matter of swapping bits of paper. This transaction creates nothing in the way of current production and is not included in GDP.

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 nondurable consumer goods. Combining the household spending on durable goods, nondurable goods, and services and use the symbol C.

Value Added

The market value of a firm's output minus the value of the inputs the firm has bought from others. Found by adding together all the values by all firms.

Expenditures Approach

The method that adds all the expenditures made for final goods and final services to measure the GDP.

Income Approach

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

Transfer Payment

The social security, welfare, and veterans' payments that the government makes directly to households or the giving of money from one individual to another. The funds are transferred from one entity to another without entering GDP.

National Income "NI"

The total of all sources of private income plus government revenue from taxes on production and imports. The total income of Americans, whether it was earned in the United States or abroad.

Multiple Counting

Wrongfully including the value of intermediate goods in the GDP; counting the same good or service more than once.

Shortcoming of GDP Measure

a. Nonmarket Activities b. Leisure c. Improved product quality d. Underground economy e. GDP & Environment f. Composition & Distribution output g. Noneconomic Sources of Well Being.