Econ 50 Chapter 5

National income accounting

Measurement of aggregate economic activity.

National income accounts (Usage)

Information used to assist economic policy makers in formulating policies and evaluating performance.

GDP (Definition)

The total market value of all final goods and services.

GDP per capita

Is equal to a nation's GDP divided by its population.

Excluded from GDP

Non-commercial activities such as the value of lawn mowing provided by a teenager for his own family.

Real GDP (Accuracy)

More accurate than nominal GDP in making comparisons of output over time because nominal GDP may change simply because of price changes over time.

Depreciation

The consumption of capital in the production process.

Net domestic product

Equal to GDP minus depreciation.

Investment (Economics)

The purchase of capital goods used in production.

Production possibilities expansion

An economy's production possibilities are most likely to expand if net investment is positive.

National income accounting

The measurement of aggregate economic activity, particularly national income and its components.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within a nation's borders in a given time period.

Gross National Product (GNP)

The output produced by American-owned factors of production, regardless of where they are located.

GDP per capita

$\text{Total GDP} / \text{total population}$; it serves as a statistical average of output per person but tells nothing about how GDP is distributed.

Nonmarket activities

Goods and services that are produced but not sold in the market, which are excluded from GDP measures.

Unreported Income

Market activities that are not reported to tax or census authorities, often referred to as the underground economy.

Value added

The increase in the market value of a product that takes place at each stage of the production process; calculated as market value minus the cost of intermediate goods.

Intermediate goods

Goods or services purchased for use as input in the production of final goods or in services.

Nominal GDP

The value of final output produced in a given period, measured in the prices of that period (current prices).

Real GDP

The value of final output produced in a given period, adjusted for changing prices.

Real GDP Formula

$$\text{Real GDP in year } t = \frac{\text{Nominal GDP in year } t}{\text{Price index}}$$

Base year

The year used as the basis for indexing price changes to convert nominal values to real values.

Chain-weighted price index

An inflation adjustment that uses a moving average of price levels in consecutive years.

Net Domestic Product (NDP)

Gross Domestic Product (GDP) less depreciation ($\text{NDP} = \text{GDP} - \text{Depreciation}$).

Depreciation

The consumption of capital in the production process, represented by the wearing out of plant and equipment.

Net investment

Gross investment less depreciation ($\text{Net investment} = \text{Gross investment} - \text{Depreciation}$).

Consumption

Goods and services used by households.

Investment

The plants, machinery, and equipment produced, net changes in business inventories, and expenditures for residential construction.

Net Exports

The value of exports ($X$) minus the value of imports ($M$).

GDP Components Formula

$GDP = C + I + G + (X - M)$ where $C$ is consumption, $I$ is investment, $G$ is government expenditure, $X$ is exports, and $M$ is imports.

National Income (NI)

The total income earned by current factors of production, calculated as $\text{NI} = \text{NDP} + \text{Net foreign factor income}$; also requires adjusting for statistical discrepancies.

Personal Income (PI)

The income received by households before payment of personal taxes.

Disposable Income (DI)

The after-tax income of households, which is either consumed or saved ($\text{DI} = \text{Consumption} + \text{Saving}$).

Saving

The part of disposable income that is not spent on current consumption.