ECON 1220-CH8

Government purchases

Spending by federal, state, and local governments on goods and services.

Consumption

Spending by households on goods and services, not including spending on new houses. Consumption can be devided into expenditures on services, expenditures on nondurable goods and expenditures on durable goods.

Shortcomings of GDP as a Measure of Well-Being

The Value of Leisure Pollution or Other Negative Effects of Production Changes in Crime and Other Social Problems Ignore wealth distribution

Economic growth

The ability of an economy to produce increasing quantities of goods and services.

Gross domestic product (GDP) Also called "Gross Domestic Income"

The market value of all final goods and services produced in a country during a period of time, typically one year. In particular, GDP does not include the value of used goods. Y = C + I + NX + G

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.

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.

Advantage of chain-weighted price

Using base-year prices has a disadvantage that prices may change relative to each other.

National income

GDP - depreciation (consumption of fixed capital)

GNP (Gross National Product)

GDP - foreign firm local product + national firm foreign product

Final good or service

A good or service purchased by a final user.

Intermediate good or service

A good or service that is an input into another good or service, such as a tire on a truck.

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.

Investment

Business fixed investment, residential investment and changes in business inventories (Business fixed investment is spending by firms on new factories, office buildings, and machinery used to produce other goods. Residential investment is spending by households and firms on new single-family and multi-unit houses. Changes in business inventories are also included in investment.) In particular, GDP doesn't include purchases of stock or rare coins or deposits in savings accounts in the definition of investment because these activities don't result in the production of new goods.

Shortcoming when it comes to measuring production

Household production and underground economy: Household production refers to goods and services people produce for themselves. Underground economy refers to buying and selling of goods and services that are concealed from the government to avoid taxes or regulations or because the goods and services are illegal. If considering how the economy is performing over short periods of time, it doesn't matter. If considering how the production of goods and services grows over fairly long periods of a decade or more, omitting household production and production in the underground economy may be more important.

Affected both by the business cycle and by other long-run factors?

In the short run, the level of employment is significantly affected by the business cycle, but in the long run, other factors determine the level of employment. As with employment, inflation is affected both by the business cycle and by other long-run factors.

Increasing Saving: GOOD or BAD?

Increased household saving can be good news for the economy in the long run because it provides more funds that firms can borrow to finance investment, which can lead to more rapid rates of economic growth. In the short run, as consumption will reduce, not good for firms.

National income accounting

It refers to the methods the BEA uses to track total production and total income in the economy. The statistical tables containing this information are called the National Income and Product Accounts (NIPA) tables.

Four factors of production & Four corresponding categories of income

Labor = wages Capital = interest Natural resources = rent Entrepreneurship = profit

Personal income

National income - earnings that corporations retain + transfer payments + interest on government bonds

Transfer payments

Payments by the government to households for which the government does not receive a new good or service in return. These payments are not included in GDP because they are not received in exchange for production of a new good or service.

Disposal income

Personal income - tax payment