Chapter Eight: GDP: Measuring Total Production and Income (Part 3: Macroeconomics Foundations and Long-Run Growth)
Expenditure Approach requires information on:
1. Consumption 2. Investment 3. Government 4. Net Exports
The BEA divides its statistics on GDP into four major categories:
1. Consumption 2. Investment 3. Government Purchases 4. Net Exports
Shortcoming of GDP as a Measure of Total Production:
1. Does not include household production (values of goods/services not bought/sold in markets) 2. Does not include estimates for the underground economy (at most, estimated as 10% of calculated GDP)
Firms sells goods and services to three groups:
1. Domestic Households 2. Foreign Firms and Households 3. The Government
What are the two approaches to arrive at GDP?
1. Expenditures 2. Income
What are the three general uses of GDP?
1. Gauge economic activity from year to year 2. Establish corrective measures 3. Measure national well being
Factors of Production:
1. Labor 2. Capital 3. Natural Resources 4. Entrepreneurial Ability
GDP does not included two types of production:
1. Production in the home 2. Production in the underground economy
Examples of Government Purchases:
1. Teachers Salaries' 2. Highways 3. Aircraft Carriers
Shortcomings of GDP as a Measure of Well-Being:
1. The value of leisure is not included in calculation (think retirement) 2. It is not adjusted for pollution or other negative effects of production (think chemicals and cancer) 3. It is not adjusted for changes in crime and other social issues (think police and drug addiction) 4. It measures the size of the "pie," but not how the "pie" is divided (unequal distributions)
When the economy faces a downturn:
1. Unemployment increases 2. Income falls
Income is divided into four categories:
1. Wages 2. Interest 3. Rent 4. Profit
Total Income is divided among five categories:
1. Wages 2. Interest 3. Rent 4. Profit 5. Specific Non-Income Items
Income Approach requires information on the sum of all payments, including:
1. Wages/Salaries 2. Proprietors Income 3. Corporate Profit 4. Rental Income 5. Interest Income
Final Good/Service
A good/service purchased by a final user
Intermediate Good/Service
A good/service that is an input into another good or service
Price Level
A measure of the average prices of goods and services in the economy
GDP Deflator
A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
Business Cycle
Alternating periods of economic expansion and economic recession
Expenditures on Durable Goods
Automobiles and furniture
The largest component of investment:
Business Fixed Investment
Underground Economy
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods/services are illegal
Changes in Business Inventories
Changes in the stocks of goods that have been produced, but not yet sold
GDP (Expenditure Method) =
Consumption + Investments + Government + Net Exports Y = C + I + G + NX Where NX = X - M X = exports M = imports
Depreciation
Consumption of Fixed Capital; the production of new goods/services to replace old goods/services
What are the four major categories of expenditure?
Consumption, investment, government purchases, and net exports
Exports
Expenditures by foreign firms and households on domestically produced goods and services
Net Exports =
Exports - Imports
True or False: National Income (NI) is equal to GDP.
FALSE
True or False: Transfer Payments are included in GDP calculation.
FALSE; these payments are not included in GDP because they are not received in exchange for production of a new good/service
Firms use the:
Factors of Production
Households supply _________________ to firms in exchange for __________.
Factors of Production; Income
Banks, Stock, and Bond Markets make up the:
Financial System
Expenditures on Nondurable Goods
Food and Clothing
Imports
Foreign-produced goods/services
GDP per capita =
GDP / Population
Gross Domestic Income
GDP calculated as the sum of income payments to households
Why is GDP an imperfect measurement of total production in the economy?
GDP does not include household production or production from the underground economy
National income is
GDP minus depreciation
GDP per capita
GDP per person
Imports are:
Goods/services produced in foreign countries and purchased by U.S. firms, households, and governments
Purchases made by state and local governments are:
Greater than purchases made by the federal government
National Domestic Product (NDP) =
Gross Domestic Product (GDP) - Capital Consumption Allowance (Depreciation; CCA)
Government Spending on Transfer Payments:
IS NOT INCLUDED IN Government Purchases because the spending does NOT result in the production of new goods/services
Wages
Include all compensation received by employees, including fringe benefits such as health insurance
Profit
Includes the profits of sole proprietorships, which are usually small businesses, and the profits of corporations
Personal Income
Income received by households
Macroeconomic analysis provides:
Information that consumers and firms need in order to understand current economic conditions and to help predict future conditions
One of the goals of economic policy is to:
Maintain a stable price levvel
Expenditures on Services
Medical care, education, haircuts
Personal Income (PI)
Money received by households before taxes
Consumer spending on services is:
More than double the spending on durable and nondurable goods combined
True or False: Countries with lower levels of GDP per capita are better off.
Mostly FALSE; it is typically implied that countries with HIGHER levels of GDP per capita are better off; although increases in a country's GDP per capita often do lead to increases in the overall well-being of the population, it's important to be aware that GDP has a few shortcomings
National Income (NI) =
National Domestic Product (NDP) - Indirect Business Taxes (IBT)
Interest
Net interest received by households, or the difference between the interest received on savings accounts, government bonds, and other investments and the interest paid on car loans, home mortgages, and other debts
Transfer Payments
Payments made by the government to households for which the government does not receive a new good/service in return
Disposable Income (DI) =
Personal Income (PI) - Taxes
Disposable Personal Income =
Personal Income - Personal Tax Payments
Disposable personal income is
Personal income minus personal taxes
The estimate of real GDP can be somewhat distorted because:
Prices may change relative to each other, and this change is not reflected in the fixed prices from the base year; the further from the base year, the more distorted
Holding prices constant means that:
Purchasing power of a dollar remains the same from one year to the next
Household Production
Refers to goods/services people produce for themselves
National Income Accounting
Refers to the methods the BEA uses to track total production and total income in the economy
Rent
Rent received by households
Government Purchases
Spending by federal, state, and local governments on good/services
Investment (Gross Private Domestic Investment)
Spending by firms on new factories, machinery, office buildings, and additions to inventories, plus spending by households and firms on new houses; divided into three categories: business fixed investment, residential investment, changes in business inventories
Business Fixed Investment
Spending by firms on new factories, office buildings, and machinery used to produce other goods
Residential Investment
Spending by households and firms on new single-family and multi-unit houses
Consumption
Spending by households on goods/services, not including spending on new houses; divided into three categories: service expenditures, no durable goods expenditures, durable goods expenditures
True or False: Disposable Personal Income is the best measure of the income households actually have available to spend.
TRUE
True or False: In your base year, Nominal GDP = Real GDP.
TRUE
True or False: The total production is equal to the value of total income.
TRUE
True or False: GDP does NOT include the value of used goods/services.
TRUE; GDP only includes the goods/service PRODUCED during the given time period
True or False: In calculating GDP, we include the value only final goods/services.
TRUE; if we calculated the value of both intermediate goods/services with final goods/services, we would be double counting
Chain-Weighted Prices
Takes an average of the prices in the base year and the prices of year being evaluated; then, it uses this average to calculate real GDP; distortion is minimized
Exports are goods and services produced in ___________ and purchased by _______________________.
The U.S.; foreign firms, households, and governments
Economic Growth
The ability of an economy to produce increasing quantities of goods/services
Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in thewell-being of thepopulation, why is real GDP not a perfect measure ofwell-being?
The costs of pollution are not included, the value of leisure is not included, GDP does not include crime rates or income distribution
Measure production by taking:
The dollar value of all the goods/services produced
Profti
The income that remains after a firm has paid wages, interest, and rent; return to entrepreneurs and other business owners for bearing the risk of producing and selling goods/services
Value Added
The market value a firm adds to a product
Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country during a period of time, typically one year
Inflation Rate
The percentage increase in the price level from one year to the next
Recession
The period of a business cycle during which total production and total employment are decreasing
Expansion
The period of a business cycle during which total production and total employment are increasing
Microeconomics
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Macroeconomics
The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
National Income (NI)
The total value of production of land, labor, capital, and entrepreneurial ability within ONE YEAR, looking at what is earned over the factors of production within that year
Real GDP
The value of final goods and services evaluated at base-year prices
Nominal GDP
The value of final goods and services evaluated at current-year prices
Gross National Product (GNP)
The value of final goods and services produced BY the residents of the U.S., even if the production takes place OUTSIDE the U.S.
Gross Domestic Product (GDP)
Total market value of all final goods and services produced by firms and individuals within the same nation during a given period of time
Governments make _____________ to households in exchange for hiring workers/other factors of production
Transfer Payments
True or False: When measuring GDP over long periods of time, the omission of the Underground Economy and Household Production can significantly impact importance of the collected data.
True; it does not differ much from year to year, but over a decade, it can heavily skew interpretation
Firms pay _________ to households in exchange for labor services, interest for the use of capital, and rent for natural resources such as land.
Wages
The largest component of gross domestic income is:
Wages
Total Income of an Economy =
Wages + Interest + Rent + Profit
GDP (Income Approach) =
Wages/Salaries + Proprietors Income + Corporate Profit + Rental Income + Interest Income
GDP is frequently used as a measure of:
Well-being
GDP Equation
Y = C + I + G + NX