CHAPTER 8: GDP and National Income - Measuring Economic Performance

Gross Domestic Product (GDP)

The inflation-adjusted value of all newly produced goods and services calculated and published by a government.

Nominal GDP

The total value of all goods and services produced in a country at current market prices, without adjusting for inflation.

Real GDP

The total value of all goods and services produced in a country, adjusted for inflation.

National Income Accounting

A measurement system used to estimate national income and its components.

Product Markets

Transactions in which households buy goods.

Factor Markets

Transactions in which businesses buy resources.

Total Income

The yearly amount earned by the nation's resources, including wages, rent, interest payments, and profits.

Final Goods and Services

Goods and services that are at their final stage of production and will not be transformed into yet other goods or services.

Profits

The return entrepreneurs receive for the risk they incur when organizing productive activities. Gross corporate profits and proprietors' income.

Economic Exchange

A transaction where goods and services flow in one direction and money payments flow in the other.

Aggregate Production

The total output of goods and services produced in an economy.

Inflation

The rate at which the general level of prices for goods and services is rising.

Labor Force Participation

The percentage of the working-age population that engages in the labor market.

Economic Performance

A measure of how well an economy is performing, often assessed through GDP and national income.

Smooth Growth

A term used to describe growth that appears too consistent or regular, raising skepticism about its accuracy.

Households

The economic agents that buy goods in product markets.

Businesses

The economic agents that buy resources in factor markets.

Components of National Income

The various elements that make up the total national income, including wages, rents, interests, and profits.

Economic Indicators

Statistics that provide information about the economic performance of a country, such as GDP, unemployment rates, and inflation.

Aggregate Income

The total income earned by all factors of production in an economy.

Rent

Payments made for the use of land or property.

Interest Payments

Payments made to capital owners for the use of their funds.

Entrepreneurs

Individuals who organize and manage the factors of production, taking on the associated risks.

Total output

The dollar value of total output must equal total income.

Gross domestic product (GDP)

The total market value of all final goods and services produced by factors of production located within a nation's borders during a year. Gross domestic income plus indirect business taxes and depreciation.

Final output

The dollar value of final goods and services produced per year by factors of production located within a nation's borders.

Final good

A good that is sold to the end consumer, such as bread or an automobile.

Intermediate goods

Goods used up entirely in the production of final goods.

Value added

The dollar value of an industry's sales minus the value of intermediate goods used in production.

Income payments

The total value added is equal to the sum of all income payments.

Gross Output (GO)

The total market value of all goods and services produced during a year by factors of production located within a nation's borders.

Double Counting

The inclusion of all forms of business-to-business expenditures in GDP, which counts business spending across all stages of production.

Financial Transactions

Transactions that do not involve the production of final goods and services, including securities and government transfer payments.

Securities

Financial instruments such as stocks and bonds.

Government Transfer Payments

Payments made by the government to individuals, such as Social Security and unemployment compensation.

Private Transfer Payments

Payments made between individuals or corporations, such as individual gifts and corporate gifts.

Transfer of Secondhand Goods

The sale of used items, which is not counted as part of GDP.

Excluded Transactions

Transactions that are not included in GDP, such as household production and underground transactions.

Household Production

Nonmarket production activities performed within the household that are not included in GDP.

Underground Transactions

Legal and illegal economic activities that are not reported and thus excluded from GDP.

GDP Limitations

GDP excludes nonmarket production and is not necessarily a good measure of the well-being of a nation.

Behavioral Economists

Economists who study psychological factors in economic decision-making and may use surveys to measure well-being.

Market Values

Dollar values assigned to activities that occur in the market, which can increase measured GDP.

Economic Activity

The production of goods and services measured in terms of market prices.

Welfare Measurement

GDP is not a measure of a nation's overall welfare.

Data Science Campus

A facility established by the United Kingdom's Office for National Statistics to analyze data from digital devices.

Machine Learning in GDP Computation

The application of machine learning techniques to improve existing GDP computations and develop alternative measures of economic activity.

Expenditure approach

Computing GDP by adding up the dollar value at current market prices of all final goods and services.

Income approach

Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits.

Consumption expenditures (C)

Expenditures on durable consumer goods, nondurable consumer goods, and services.

Durable consumer goods

Items that last more than three years (e.g., automobiles, furniture).

Nondurable consumer goods

Goods that are used within three years (e.g., gasoline, food).

Services

Mental or physical help provided to consumers.

Gross private domestic investment (I)

The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future.

Producer durables

Capital goods with a life span of more than three years.

Fixed investment

Purchases by business of newly produced producer durables or capital goods.

Inventory investment

Changes in stocks of finished goods and goods in process, as well as changes in raw materials.

Government expenditures (G)

Expenditures by state, local, and federal governments, valued at cost.

Net exports (X)

Net exports (X) = total exports - total imports.

GDP formula

GDP = C + I + G + X.

Net domestic product (NDP)

GDP allowing for depreciation (capital consumption allowance).

Depreciation

The amount that businesses would have to save in order to repair and replace deteriorating machines and other equipment.

NDP formula

NDP = GDP - depreciation.

Net investment (net I)

Net investment = I - depreciation.

Change in capital stock

The change in the capital stock over a one-year period.

Gross domestic income (GDI)

The sum of all income (wages, interest, rent, and profits) paid to the four factors of production.

Wages

Salaries and labor income. Payments made to labor for their contribution to production.

Interest

Interest received (savings accounts) minus interest paid (mortgages).

Indirect business taxes

All business taxes except the tax on corporate profits, including sales and business property taxes.

National income (NI)

The total of all factor payments to resource owners.

Personal income (PI)

The amount of income that households actually receive before they pay personal income taxes.

Disposable personal income (DPI)

Personal income after personal income taxes have been paid.

Nominal values

Measurements in terms of the actual market prices at which goods are sold; expressed in current dollars, also called money values

Real values

Measurements after adjustments have been made for changes in the average of prices between years; expressed in constant dollars

Constant dollars

Dollars expressed in terms of real purchasing power

Real GDP formula

Real GDP = nominal GDP / price index × 100

Per capita real GDP

Real GDP divided by total population

Per capita real GDP formula

Per capita real GDP = real GDP / population

Foreign exchange rate

The price of one currency in terms of another

Purchasing power parity

An adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries

GDP deflator

Used to calculate values for real GDP from 2010 to 2020

GDP

The total market value of a nation's final output of goods and services produced in a year using factors of production located within its borders.

Purchasing Power Parity

A method of measuring the relative value of currencies based on the cost of goods and services in different countries.

Per Capita GDP

The GDP divided by the population of a country, indicating the average economic output per person.

GDP Deflator

A measure of the level of prices of all new, domestically produced, final goods and services in an economy.

Expenditure Approach

A method of calculating GDP that sums consumption, investment, government spending, and net exports (GDP = C + I + G + X).

Income Approach

A method of calculating GDP that sums all incomes earned by factors of production, including wages, rent, interest, and profits.

National Income

The total income earned by a nation's residents and businesses, including wages, profits, rents, and taxes.

Personal Income

The total income received by individuals, including wages, dividends, and other forms of income.

Disposable Personal Income

Personal income minus personal taxes, representing the amount available for spending and saving.

GDP Growth Rate

The rate at which a country's GDP increases from one period to another, often expressed as a percentage.

Quality Changes

Adjustments made to GDP calculations to account for improvements or declines in the quality of goods and services.

Gross Output

A measure of economic activity that includes the total value of all goods and services produced in the economy.

Real GDP Targeting

A practice where governments aim for specific growth rates in reported GDP figures, potentially leading to manipulated data.

Economic Transaction

An exchange of goods and services that involves a receipt of payment.

Circular Flow of Income

A model that illustrates how money moves through the economy, showing the relationship between producers and consumers. In every economic exchange, the seller receives exactly the same amount that the buyer spends.

Economic Performance Measures

Various metrics used to assess the economic health of a nation, including GDP, gross output, and other indicators.

Components of GDP

The major elements that contribute to GDP calculations, including consumption, investment, government spending, and net exports.

Limitations of GDP

GDP does not account for nonmarket transactions, does not measure national well-being, and reflects production flow rather than wealth.

GDP Exclusions

Nonmarket transactions and informal economic activities that are not included in GDP calculations.