Chapter 7 -

nominal gross domestic product (GDP)

GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation. Compare with real gross domestic product (real GDP).

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. Compare with nominal GDP.

Income approach

The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.

base year

The year with which other years are compared when an index is constructed; for example, the base year for a price index.

Gross National Product

is the measure of the total market value of all final goods produced by citizens of a country in a given time period, usually one year. Is the difference between what US citizens earn abroad and what foreigners earn in the US.

National income accounting

measure and evaluate the economy's overall performance (what a nation spent vs what they earned)

Intermediate goods and services

products that are purchased for resale or further processing or manufacturing.

Depreciation

the decrease in the value of assets over time

Gross output (GO)

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

Personal consumption expenditures

the expenditures of households for both durable and nondurable consumer goods

Expenditure approach

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

Gross domestic product (GDP)

the total market value of all final goods and final services produced annually within the boundaries of a nation. Only includes the market value of final goods and ignores intermediate goods.

Value added

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

price index

An index number that shows how the weighted-average price of a "market basket" of goods changes over time relative to its price in a specific base year.

Service

An intangible act or use which a consumer, firm or government is willing to pay

disposable income (DI)

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

Final goods and services

Products that have been produced for final use (rather than for resale or further processing or manufacturing. Purchased for use.

personal income (PI)

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

What is excluded from GDP calculations:

- Intermediate goods 1. Public transfer payments 2. Private transfer payments 3. Stock market transactions

Why use national income accounting to:

- Measure and describe economic activity - Compare data with past performance - Compare our economy with that of other nations - Provide information to evaluate economic policy

Gross Private Domestic Investment The following items fall in the category of GPDI:

- Residential construction - Changes in inventories - Money spent on the creation of new networks of art, music, writing, film and software - Expenditures on Research and Development of the new productive technologies - Final purchases of plant, machinery, and equipment by business enterprises.

Where can we get NIA information?

- The Bureau of Economic Analysis (BEA) complies the National Income and Product Accounts (NIPA) for the US economy.

Methods used to measure national income:

1. Gross Domestic Product 2. Gross National Product 3. Value Added

Measuring GDP: There are two general approaches to measuring gross domestic product:

1. Income approach 2. Expenditure approach

Nondurable good

A consumer with an expected life (use) of three of more years.

taxes on production and imports

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

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.

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 that increase the nation's stock of capital, which is the collection of physical objects and intangible ideas that help to produce goods and services. Includes spending on final purchases of plant, machinery, and equipment by business enterprises; residential construction; changes in inventories; expenditures on the research and development (R&D) of new productive technologies; and money spent on the creation of new works of art, music, writing, film, and software.

Net exports

Exports minus imports

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.

Net investment calculations:

Gross investment - Depreciation = Net Investment When the net investment is positive = growing economy When net investment is negative = economy is in recession When net investment is zero = economy is stagnant

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.

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.

Equation for Gross domestic product (GDP)

Total output x price per unit = GDP

Durable good

a consumer good with a expected life (use) of three of households for both durable and nondurable consumer goods

Secondhand sales

secondhand sales contribute nothing to current production and are therefore excluded from GDP. Suppose you sell you 2012 Ford to a friend. The transaction will not be counted in this years GDP as it was counted in 2012 and adds no current production.

Multiple counting

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