Module 10

Net exports

the difference between the value of exports and the value of imports (X-IM)

Consumer spending

household spending on goods and services.

National income and product accounts/ nation accounts

keep track of the flows of money between different sectors of the economy.

Government transfers

payments that the government makes to individuals without expecting a good or service in return.

Investment spending

spending on new productive physical capital, such as machinery and structures and on charges in inventories.

Inventories

stocks of goods and raw material held to facilitate business operations.

Government borrowing

the amount of funds borrowed by the government in the financial markets.

Identify each of the sectors to which firms make sales. What are the various ways in which households are linked with other sectors of the economy?

Firms make sales to other firms, households, the government, and the rest of the world. Households are linked to firms through the sale of factors of production to firms, through purchases from firms of final goods and services, and through lending fund to firms in the financial markets. Households are linked to the government through their payment of taxes, their receipt of transfers, and their lending of funds to the government to finance government borrowing via the financial markets. Finally households are linked to the rest of the world through their purchases of imports and transactions with foreigner in financial markets.

Aggregate spending

the total spending on domestically produced final goods and services in the economy-is the sum of consumer spending (C), investment spending (I), government purchases of goods and services (G), and exports minus imports. (X-IM)

Gross domestic product (GDP)

the total value of all final goods and services produced in the economy during a given year.

Value added

the value of its sales minus the value of its purchases inputs.

Product markets

where goods and services are bought and sold.

Factor markets

where resources, especially capital and labor, are bought and sold.

Explain why the three methods of calculating GDP produce the same estimate of GDP.

Let's start by considering the relationship between the total value added of all domestically produced final goods and services, and aggregate spending on domestically produced final goods and services. These two quantities are equal because every final good and service produced in the economy is either purchased by someone or added to inventories, and additions to inventories are counted as spending by firms. Next, consider the relationship between aggregate spending on domestically produced final goods and services and total factor income. These two quantities are equal because all spending that is channeled to firms to pay for purchases of domestically produced final goods and services is revenue for firms. Those revenues must be paid out by firms to their factors of production in the form of wages, profit, interest, and rent. Taken together, this means that all three methods of calculating GDP are equivalent.

Financial markets

The banking, stock, and bond markets which channel private savings and foreign lending into investment spending government borrowing and foreign borrowing.

Draw a correctly labeled circular-flow diagram showing the flows of funds between the markets for goods and services and the factor markets. Add the government to your diagram, and show how money leaks out of the economy to the government and how money is injected back into the economy by the government.

This diagram should resemble Figure 10.3 plus the top half (the Government section) of figure 10.2 The leakages in this scenario are taxes and private savings that feed into government borrowing and the injections are government purchases of goods and services and government transfers.

Consider Figure 10.3. Explain why it would be incorrect to calculate total value added as $30,500, the sum of the sales price of a car and a car's worth of steel.

You would be counting the value of the steel twice-once as it was sold by American Steel to American Motors and once as part of the car sold by American Motors.

Bond

a loan in the form of an IOU that pays interest.

Household

a person or group of people who share income.

Stock

a share in the ownership of a company held by a shareholder.

Will each of the following transactions be included in GDP for the United States? Explain why or why not. a. Coca-Cola builds a new bottling plant in the United States. b. Delta sells one of its existing airplanes to Korean Air. c. Ms. Moneybags buys an existing share of Disney stock. d. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada. e. An American buys a bottle of French perfume in Tulsa. f. A book publisher produces too many copies of a new book; the books don't sell this year, so the publisher adds the surplus books to inventories.

a. Yes. New structures built in the United States are included in U.S. GDP. b. No. The airplane is used, and sales of used goods are not included in GDP. c. No. This is a transfer of ownership-not new production. d. Yes. This is an export. e. No. This is an import-it was not produced in the United States. f. Yes. Additions to inventories are considered investments.

Which of the following is included GDP? a. changes to inventories b. intermediate goods c. used goods d. financial assets (stock and bonds) e. foreign-produced goods

a. changes to inventories

Which of the following components makes p the largest percentage of GDP measured by aggregate spending? a. consumer spending b. investment spending c. government purchases of goods and services d. exports e. imports

a. consumer spending

Government purchases of goods and services

are total expenditures on goods and services by federal, state, and local governments.

Firm

an organization that produces goods and services for sale.

Which of the following is not included in GDP? a. capital goods such as machinery b. imports c. the value of domestically produced services d. government purchases of goods and services e. the construction of structures

b. imports

Which of the following is true? The simple circular-flow diagram I. includes only the product markets. II. includes only the factor markets. III. is a simplified representation of the macroeconomy. a. I only b. II only c. III only d. I and II only e. none of the above

c. III only

GDP is equal to a. the total value of all goods and services produced in an economy during a given period. b. C + I + G + IM c. the total value of intermediate goods plus final goods. d. the total income received by producers of final goods and services. e. none of the above.

e. none of the above.

Private savings

equal to disposable income minus consumer spending, is disposable income that is not spent on consumption.

Disposable income

equal to income plus government transfers minus taxes, is the total amount of household income available to spend on consumption and to save.

Intermediate goods and services

goods and services bought from one firm by another firm to be used as inputs into production of final goods and services.

Imports

goods and services purchased from other countries

Final goods and services

goods and services sold to final, or end, user.

Exports

goods and services sold to the other countries.