Chapter 19

Nominal/Real GDP, GDP, Income/Expenditure Approach

What is the business cycle?

Alternating increases/decreases in economic activity

Peak

Temporary maximum level of economic growth

Recession

After the peak. Consistent decline in economic growth

Trough

After the recession. Temporary lowest point of economic growth.

Expansion

After the trough. There is a consistent increase in economic growth.

What economic trend do we expect in the long run?

Economic growth

What are three things that the Bureau of Economic Analysis does?

Uses the GDP to assesses the health of the economy, track long run course, and formulate policy

What is the GDP?

The market value of all final foods and services produced in the borders of one country.

What do we exclude from the GDP?

Intermediate goods, public transfer payments, private transfer payments, second-hand sales, and stock market transactions

What are intermediate goods?

Goods producers buy to build their products

What are public transfer payments?

Payments from the government to the people such as disability checks

What are private transfer payments?

Gifts like gift cards from a friend

What are second-hand sales?

Donations

What is the Gross National Product (GNP)

Market value of all final goods and services that depends on who is making the product

What is the expenditures approach?

Where we count the sum of money spent buying the final goods. (Consumption + Investment + Government purchases + net exports)

What is the income approach?

Where we count the income derived from production. (Wages + Rents + Interest + Profits + statistical adjustments)

What are personal consumption expenditures?

They’re made by private households. Consist of durable goods, nondurable goods, consumer expenditures for services, and domestic and foreign produced goods.

What are private domestic investments?

Machinery, equipment, tools, constructions, changes in inventories, and depreciation.

What is government spending?

Expenditures for goods, services, publicly owned capital, and transfer payments

What are net exports?

Exports - imports

Concerning the income approach, what do we need to subtract from the national income to get the GDP?

Net foreign factor income: income earned by Americans working overseas

What is nominal GDP?

Based on pries in the current year when output was produced, but considered inaccurate since it could mistake growth when compared year to year.

What is real GDP?

Uses a year of production as a baseline to compare other years of production. Considered accurate as it eliminates price fluctuation that occurs in nominal GDP.

How to calculate Real GDP?

Nominal GDP/GDP Price Index** 100 OR Units of Ouput ** Base Year’s Price

How to calculate GDP Price Index in a Given Year

Price of Market basket in specific year/price of market basket in base year \* 100

What is the GDP Price Index/Price Deflator?

It shows us how prices have been fluctuating around the base year