Macro chapter 25 (7)
when to use Ig and In?
Ig is gross investment In is net investment when tallying up GDP, you use Ig
U.S. gross national product (GNP)
In contrast to GDP, consists of the total value of all the final goods and services produced by American-supplied resources, whether those goods and services are produced within the borders of the United States or *abroad*.
Financial Transactions
NOT INCLUDED in GDP. 3 types: Public transfer goods private transfer payments stock market transactions
Secondhand Sales
NOT INCLUDED in GDP. do not contribute to current production. Ex: i sold my car to my neighbor, generates no current production (the cost in making the car and selling to me would have already been included)
Personal Income (formula)
National income - income earned but not received (corp taxes, undistributed corp. profits, taxes on production and imports, social security contributions) + Income received but not earned (transfer payments)
When measuring aggregate output, are all goods and services included?
No, all goods and services produced in a particular year must be counted once and only once. Because most products go through a series of production stages before they reach the market, some of their components are bought and sold many times. To avoid counting those components each time, GDP includes only the market value of final goods and ignores intermediate goods altogether.
gross investment
The word "gross" means that we are referring to all investment goods—both those that replace machinery, equipment, and buildings that were used up (worn out or made obsolete) in producing the current year's output and any net additions to the economy's stock of capital. gross investment includes investment in replacement capital AND in added capital gross investment = deprecation + net investment
Monetary Measure
Unit of measurement is money, only economic activities measurable in money are included.
depreciation ?
the amount of capital that is used up over the course of a year. Its the replacement capital
personal consumption expenditures
the expenditures of households of durable consumer goods + non durable consumer goods + services = C
disposable income (definition and formula)
the left over income that households have after paying their taxes. They are able to buy things with it or save. to get it, Personal income - personal taxes
income approach (definition)
the method that adds all the income generated by the product of final good and services to measure GDP
expenditure approach (definition)
the method that adds up the amount of money spent (expenditure) in making a final good or service to measure GDP
Aggregate output
the primary measure of the economy's performance is its annual total output of goods and services. (multiply ways to measure)
National Income accounting
the techniques used to measure the overall production of a country's economy as well as other related variables
private transfer payments
type of financial transactions, not included: Such payments include, for example, the money that parents give children or the cash gifts given during the holidays. They produce no output. They simply transfer funds from one private individual to another and consequently do not enter into GDP.
government purchases
"government consumption expenditures and gross investment." These expenditures have three components: (1) expenditures for goods and services that government consumes in providing public services; (2) expenditures for publicly owned capital such as schools and highways, which have long lifetimes; (3) government expenditures on R&D and other activities that increase the economy's stock of know-how.
Gross Private Domestic Investment
(business) includes all final purchases of machinery, equipment, and tools by business enterprises + All construction + Changes in inventories (unsold goods) + Money spent on research and development (R&D) or for the creation of new works of art, music, writing, film, and so on. creation of new capital assets.
Gross domestic product (GDP)
(one way to measure aggregate) the total market value of all final goods and services annually within the boundaries of a nation. It is a monetary measure
Why is the value of final goods included in GDP but not intermediate?
Because the value of final goods already includes the value of all the intermediate goods that were used in producing them. Including the value of intermediate goods would amount to multiple counting, and that would distort the value of GDP.
national income formula (3)
Consumption of employees (wages) + rents + interest + proprietors income (profits) + corporate profits (profits) + taxes on production on imports OR GDP - deprecation + net foreign factor income OR NDP - statistical discrepancy + net foreign factor income
income approach (formula)
Consumption of employees (wages) + rents + interest + proprietors income (profits) + corporate profits (profits) + taxes on production on imports = national income... then national income + consumption of fixed capital/ deprecation + (sometimes statistical discrepancy to equalize the two approaches) - net foreign factor income (NFFI) = GDP
Net exports
Country's total exports (made within borders) minus country's total income (Produced outside the borders), used in expenditure approach
net domestic product (formula)
GDP - deprecation
taxes on production and imports
a national income accounting category that taxes a buyer, and goes back to government and is used in income approach to get national income
service
an act (intangible) in which either a consumer, firm, or the government is willing to pay for ex work done by lawyers, hairdressers, doctors etc (we buy these the most in the us)
why is "Money spent on research and development (R&D) or for the creation of new works of art, music, writing, film, and so on" included in investment?
because they are useful ideas that can increase the economy's ability to produce goods and services
Net foreign Factor Income
example: we have US machines in china and china machine in the US. we make 20 million dollars off our US machines in china (Thats our NFFI). It is included in our national income because it is earnings of americans but we need to subtract it because it is not part of US domestic income
what are two ways to get GDP?
expenditure approach (The output approach) or the income approach (earnings approach)
Value added
firm a 120 120 firm b 180 60 firm c 220 40 520 220!!!!! "the value of a product sold by a firm less the value of the products (Materials) purchased and used by the firm to produce that product." At each stage, the difference between what a firm pays for inputs and what it receives from selling the product made from those inputs is paid out as wages, rent, interest, and profit.
real GDP
has been deflated or inflated to reflect changed in price levels
net private domestic investment
includes only investment in the form of added capital. The amount of capital that is used up over the course of a year is called depreciation. So net investment = gross investment - deprecation
where do expenditures of final goods flow to?
income of private owners or income to government which is national income!
when GDP falls... when GDP rises...
inflate (make prices more expensive) deflate (make them cheaper)
what happens when deprecation is less than gross investment?
it expands the stock of private capital.
what are two ways to tell the market value?
look at how much the final user paid for it (final product approach) OR add up the wages, rent, interest and profit in making the product (Value added) it gives us the same product, looking at the same thing
price index (formula)
market basket in specific year over market basket in base year times 100
Nonproductive transactions
must be excluded from GDP because doesn't have anything to do with Final goods (2 types)
what happens when deprecation and gross investment is equal?
net investment is 0 and no change in size in stock of capital
what happens when deprecation is greater than gross investment?
net investment is negative which means it is using up more capital than its making called disinvesting. nations stock of capital shrinks (the great depression)
real GDP (formula)
nominal over price index (deflator) times 100
shortcomings of GDP (productions and wellbeing)
non market activities , leisure, improved product quality, underground economy, environment, composition and distribution output, noneconomic sources of well being
nominal GDP
not adjusted for inflation
Corporate profit
one of the 5 factors of income. to get corporate profit, if it isn't already given, you must add the corporate income taxes + dividends + undistributed corporate profits
expenditure approach (equation)
personal consumption expenditures (Households) + gross private domestic investment (businesses) + government purchases (Government) + net exports (exports-income)(foreign) C + Ig + G + Xn = GDP
in base year...
price index = 100 real = nominal
rate of inflation (formula)
price index from specific year - for previous year over previous year times 100
durable goods
products expected to live 3 years or more ex furniture, cars, etc (we buy the least of these in the US)
final goods
products purchased by their end users Ex: sunglasses bought by me!)
Intermediate goods
products that are purchased for resale or further manufacturing. ex: steal beams (is going to be further manufactured to build something)
nondurable goods
products with less than three years of expected life ex foods, clothing, gasoline (we buy these more than durable goods, but less than services in the us)
what is the US referred as?
service economy because we pay for services the most
stock market transactions
type of financial transactions, not included: The buying and selling of stocks (and bonds) is just a matter of swapping bits of paper. Stock market transactions create nothing in the way of current production and are not included in GDP. Payments for the services provided by a stockbroker are included, however, because their services are currently provided and are thus a part of the economy's current output of goods and services.
Public transfer goods
type of financial transactions, not included: These are the social security payments, welfare payments, and veterans' payments that the government makes directly to households. Since the recipients contribute nothing to current production in return, to include such payments in GDP would be to overstate the year's output.
what is "changes in inventory" and why are they an investment? How is it added to GDP?
unsold goods, and are included in Gross Private Domestic Investment because they are practically "unconsumed output" which is just adding to the stock of capital goods. (costed to make which is already counted) to make it work the production and sold items will be counted in the output for GDP the ones not sold will be counted as inventories as investment for GDP
statistical discrepancy
used for the income approach if there was mistakes and the expenditure answer is different than income. it is added on.
disinvesting
using up more capital than its making
Multiple counting
wrongly including the value of intermediate goods in the GDP: counting the same good or service more than once
