National Income Accounting Practice Flashcards

These flashcards cover the definitions, formulas, and methodologies for National Income Accounting, including GDP calculation methods and price indexes.

National Income Accounting

The measurement of the annual output and income flows of an economy, including indicators like GDP and GNP.

Economic Agents

The four main participants in the circular flow of income: households, firms (business), government, and foreigners (rest of the world).

Factor Market

A market where firms hire the resources they need to undertake production, such as land, labour, and capital, provided by households.

Income Approach

A method for measuring national income by summing all income earned by the factors of production, including wages, salaries, rent, royalties, interest, dividends, and profit.

Output Approach

A measurement of the market value of all value added or final goods and services produced by various economic agents in the economy.

Expenditure Approach

A method of calculating GDP by totaling the expenditure by individuals, firms, and government on final goods and services.

Gross Domestic Product at market price ($GDP_{mp}$)

$GDP_{mp} = C + I + G + (X - M)$, where $C$ is personal consumption, $I$ is gross private domestic investment, $G$ is government purchases, and $(X - M)$ is net export.

Net factor income

The output of nationals abroad minus the output of foreigners in the economy.

Net National Income at factor cost ($NNI_{fc}$)

The value derived by subtracting depreciation from Gross National Income at factor cost ($GNI_{fc}$).

Net indirect tax

The difference between subsidies and indirect taxes, used to convert national income between market price and factor cost.

Nominal GDP

The value of output in a given period measured in the prices of that same period.

Real GDP

A measure of physical output in the economy between different time periods that values all goods produced at the same price.

GDP Deflator

The ratio of nominal GDP in a given year to real GDP of that year, expressed as: $\frac{\text{Nominal GDP}}{\text{Real GDP}}$.

Consumer Price Index (CPI)

The price of a fixed basket of goods and services relative to the price of the same basket in a base year.

Double Counting

An error avoided in the output approach by using only the market value of final goods or value added.

Factor Endowments

The quantitative and qualitative presence of resources in a country that influences the size of its national income.

Transfer payments

Payments such as gifts or unemployment benefits that must be excluded from national income computation to ensure accuracy.

GDP Deflator (Inflation interpretation)

A measure used to determine the general price level increase; for example, a deflator of $1.45$ indicates inflation has increased by $45$ percent.

Substitution Bias

A limitation of CPI where it fails to account for consumers switching to similar utility goods (e.g., beef vs. pork) when prices rise.

Total Domestic Expenditure (TDEmp)

The sum of personal consumption expenditure ($C$), gross private domestic investment ($I$), and government expenditure ($G$).