Economics Exam 3

Gross Domestic Product

Measurement of a economies well being/ performance using countries expenditures/spending (consumer spending, investment, government spending, net exports).

Circular Spending Flow Diagram

A visual representation of the economy's flow of money between households and businesses, illustrating how spending and income circulate.

True or False - GDP also includes the market value of housing

True - GDP includes uses rental values for owned homes.

True or False - GDP also includes intermediate items/goods in the market

False - GDP doesn’t include intermediate items as they are used in the creation final goods. GDP only includes final goods sold to consumers.

True or False - GDP only uses current goods in its calculation

True - GDP only uses goods produced in the year or quarter that it was calculated in.

True or False - GDP only uses goods produced and sold in the U.S.

True the GDP does not include items that consumers purchase over seas.

What time periods is GDP calculated in?

Quarterly (every 3 months) or every year

What is used to modify quarterly GDP so it is adjusted for holidays and seasons.

Seasonal Adjustment

Gross Domestic Income

Measurement of economy well being using a countries income (wages, profit, rent, taxes, etc).

What are the Components of GDP

Consumption - Spending by Households

Investments - Spending by Firms

Government - Spending by Government

Net Export - Spending by foreign buyers (export - import)

What is Consumption in GDP?

Consumption - Spending of households such as final goods and services.

What is Investment in GDP?

Investment - The purchasing of capital goods used to make more goods.

Examples - Residential capital, Business capital, Inventories.

Business Capital

Business Capital - Includes real estate for business, equipment such as printers, intellectual products such as programs and software

Residential Capital

Real estate of homeowners or landlords

Inventory

Unsold goods by firms

Government in GDP

Government - Any good or services by local, state or federal government. It includes salaries of government workers as expenditures. (Does not include social services like social security). Net

Net Exports in GDP

The foreign purchase of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports).

Why would GDP rise?

People are consuming more or goods and services cost more.

Real GDP

The price of goods stay constant to reduce fluctuation of prices in the calculation of GDP. It allows us to look solely at demand by establishing a base year for prices. It values economy production.

Nominal GDP

A calculation of GDP that uses present prices to calculate GDP without any adjustments for inflation or deflation. It values the economy’s production of goods and services.

GDP Deflator - Meaning

An economic measure that tracks the price of goods and services. It an index used to measure the aggregated changes in the price level of all final goods and services produced within a country. (Nominal GDP/Real GDP *100)

Inflation Rate - Definition

The percentage of change in some measures of the price level from one period to the next. The inflation rate can be found with two consecutive years GDP deflator.

Inflation Rate - Equation

GDP Deflator - Equation

GDP per Capita - Equation

Inflation

An increase in the average level of prices in an economy over time.

Nominal Interest Rate

Quoted interest rate used for loans without taking account for inflation.

Real Interest Rate

The interest rate adjusted after inflation. Real interest rate = Nominal interest rate - interest rate

Nominal Income

The total amount of income received in a given amount of time measure in present dollars without the effects of inflation .

Real Income

The purchasing power of that measured by the quantity of goods and services your dollar will buy adjusted with inflation.

Consumer Price Index

Measures average change of goods and services bought by a typical consumer represented by a consumer basket.

Producer Price Index

Measures average change of selling prices of common inputs by producers (Firms).