GDP

government purchases

All final goods purchased by federal, state, and local governments during a given time period, as well as all final services purchased from labor resources.

•Real GDP is calculated as: A)nominal GDP multiplied by the price index. B)the output of goods and services in each year multiplied by each year's price index. C)the output in each year multiplied by each year's prices. D)the output in each year multiplied by the prices in the base year.

D) the output in each year multiplied by the prices in the base year.

Real GDP per capita

Real GDP per person; calculated as real GDP divided by the size of the population

Depreciation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year.

net investment

gross investment - depreciation

consumption

the largest component of GDP. : All expenditures made by households on goods and services, like clothing, food, electronics, and recreation, during a given time period

GDP expenditures

•Consumption (C) •Gross Investment (I) •Government Purchases (G) •Net Exports (NX)

inventory investment

Changes in inventories from one year to the next. Positive if firms produce more than they sell Negative if firms sell more than they produce

•Which of the following is a limitation of using real GDP per capita to measure living standards? A)Not all countries calculate GDP. B)It does not account for disparities of income distribution. C)Real GDP is a better measure. Nominal GDP is a better measure

B)It does not account for disparities of income distribution

•Which of the following is not an intermediate good? A)Tires used in a Honda automobile plant. B)Fabric used in a clothing manufacturing plant. C)A facial at a spa. D)Milk used in a cheese.

C) A facial at a spa

•When using the expenditures approach, the largest sector of GDP is usually the: A)net exports sector. B)investment sector. C)consumer sector. government sector.

C) consumer sector.

GDP price index formula

Nominal GDP/Real GDP x 100

Using the income approach you calculate GDP by including

-Indirect business taxes -Depreciation -Net foreign factor income -National income

Inflation

A general increase in prices of goods and services.

Nominal GDP

A measure of GDP in which the quantities produced are valued at current-year prices.

GDP price index

A price index based on all the goods and services that are counted as part of GDP.

Discuss the GDP price index (or GDP price deflator). Include in your discussion how it is calculated, what it represents, and what it is used to measure

GDP is the broadest measure of economic performance, and the GDP price index measures the broadest possible range of prices in the economy. Many price indices exist, such as the Consumer Price Index (CPI), but the CPI is not as broad a measure because not all the goods and services in the economy are included. The GDP price index can also be used to calculate inflation. Real GDP measures changes in output from one period to another, and is used to measure changes in price from one period to another.

final goods and services

Goods and services that are sold to the end user and are not used to produce another product for subsequent sale. We only count final goods and services when measuring production (GDP).

intermidate goods

Goods that are used to build or make another product that will be subsequently sold

national income

Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms

Define nominal GDP, describe how it is calculated, and explain why only final goods and services are included. Give examples of intermediate and final goods

Nominal GDP is a measure of the value (in current year prices) of the goods and services produced in an economy in a year. GDP is the sum of all the goods and services consumed in a year, or all the income generated by the production of goods and services in a year. Intermediate goods are excluded from GDP because they represent inputs used to produce other final products. Final goods and services are the final products that are sold to an end user. Milk is an example of both an intermediate and a final good. It is an intermediate good in the production of cheese and ice cream, but it is also a final good sold to consumers to drink or use on cereal.

services

a classified category of consumption; Outputs, often intangible, of the direct activities of another person (ex. teachers and personal trainers )

indirect business taxes

Taxes paid by businesses, such as property taxes, sales taxes, excise taxes, license fees, and tariffs. These types of taxes are paid by firms and then passed on to consumers as part of the price of the good or service produced. Indirect business taxes are differentiated from corporate income taxes on business profits

Income Approach

An approach to measuring GDP that measures the value of all final goods and services in an economy during a time period using income generated

•Which of the following statements is correct? A)The GDP price index measures changes in output. B)The GDP price index measures changes in price. C)Real GDP measures changes in price. D)Real GDP considers all sales.

B) The GDP price index measures changes in price.

•Which of the following goods or services is excluded from GDP? A)The government's purchase of tanks from a military supplier. B)The production of fruits and vegetables in someone's private backyard garden. C)A haircut at the barbershop. D)The purchase of a new car.

B) The production of fruits and vegetables in someone's private backyard garden.

•Which of the following statements is correct? A)The expenditures approach adds up expenditures by consumers, businesses, government, and households. B)The income approach adds up income earned by owners of land, owners of labor, businesses, and government. C)The income approach adds excise taxes and the net foreign factor and subtracts depreciation as adjustments to national income. D)The income approach identifies who earned what income from the production of goods and services.

D) The income approach identifies who earned what income from the production of goods and services.

consumer durables

Goods that have an average useful life of 3 years or more. classified category of consumption (ex. housing and automobiles)

Compare and contrast nominal and real GDP.

Nominal GDP is a price times quantity calculation. As a result, nominal GDP will change whenever prices and/or quantities of output change. GDP is an important statistic used to measure output in units—not output in current dollar values. Real GDP is the measure used to measure production and how it changes. To calculate real GDP, a base year is established. The output of different years is multiplied by the prices of those products in the base year. This allows for the comparison of GDP from different years. Any change in real GDP from one year to another demonstrates an increase or decrease in output, as prices are now constant.

business fixed investment

Purchases by firms of new capital goods, such as offices, factories, tools, and machinery

residential investment

Purchases of new homes; also includes home improvements

net exports

The difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). (FORMULA: NX= X-M)

net foreign factor income

The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources owned domestically

gross investment

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a fixed time period.

GDP

The market value of all final goods and services produced in an economy in a fixed period of time

consumer nondurables

a classified category of consumption; Goods that have an average useful life of less than 3 years. (ex. food and clothing)