MACROECONOMICS: Monitoring the Value of Production (GDP)

Flashcards covering key vocabulary related to GDP, its measurement, components, the circular flow, and its uses and limitations in macroeconomics.

GDP (Gross Domestic Product)

The market value of all final goods and services produced in a country in a given time period.

Market value (GDP component)

Goods and services are valued at their market prices to allow for aggregation.

Final goods and services

An item bought by its final user during a specified time period, excluding intermediate goods to avoid double-counting.

Produced within a country

GDP measures domestic production, regardless of the nationality of the producers.

In a given time period

GDP measures production during a specific time period, typically a year or a quarter of a year.

Intermediate good

An item that is produced by one firm, bought by another firm, and used as a component of a final good or service.

Circular flow diagram

An illustration of the equality of income and expenditure among households, firms, governments, and the rest of the world.

Wages

Payments made by firms to households for labor services in factor markets.

Interest

Payments made by firms to households for the use of capital in factor markets.

Rent

Payments made by firms to households for the use of land in factor markets.

Profit

Payments made by firms to households for entrepreneurship in factor markets.

Total income (Y)

The sum of wages, interest, rent, and profit; equals the total value of production and total expenditure.

Consumption expenditure (C)

The total payment by households for consumer goods and services in the goods market.

Investment (I)

Purchases of new capital equipment and additions to inventories by firms.

Government expenditure (G)

The amount governments spend on buying goods and services from firms.

Net exports (X – M)

The value of exports (X) minus the value of imports (M), representing the net flow of goods and services with the rest of the world.

Aggregate income

The total amount paid for the use of factors of production (wages, interest, rent, and profit); equals GDP.

Domestic product

Production that takes place within a country's geographical borders.

National product

The value of goods and services produced anywhere in the world by the residents of a nation.

Gross (economic term)

Refers to a value before deducting the depreciation of capital.

Net (economic term)

Refers to a value after deducting the depreciation of capital.

Depreciation

The decrease in the value of a firm’s capital resulting from wear and tear and obsolescence.

Gross investment

The total amount spent on purchases of new capital and on replacing depreciated capital.

Net investment

The increase in the value of a firm's capital, calculated as gross investment minus depreciation.

Expenditure approach (to measuring GDP)

Calculates GDP as the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports (C + I + G + X – M).

Income approach (to measuring GDP)

Calculates GDP by summing the incomes firms pay households for the factors of production they hire (wages, interest, rent, and profit).

Compensation of employees

Payments for labor services, including net wages, taxes withheld, and social security and pension fund contributions.

Net domestic income at factor cost

The sum of all factor incomes (compensation of employees, net interest, rental income, corporate profits, and proprietors' income).

Real GDP

The value of final goods and services produced in a given year when valued at the prices of a reference base year, used to compare production over time.

Nominal GDP

The value of goods and services produced during a given year valued at the prices that prevailed in that same year.

Real GDP per person

Real GDP divided by the population, indicating the average value of goods and services an individual can enjoy, used to compare standard of living over time.

Potential GDP

The value of real GDP that an economy can produce when all its labor, capital, land, and entrepreneurial ability are fully employed.

Lucas wedge

The accumulated dollar value of the gap between what real GDP per person would have been under a past growth rate and what it actually turned out to be.

Business cycle

A periodic but irregular up-and-down movement of total production and other measures of economic activity.

Expansion (business cycle)

A period during which real GDP increases, from a trough to a peak.

Recession

A period during which real GDP decreases, typically defined as negative growth for at least two successive quarters.

Peak (business cycle)

The turning point in a business cycle when an expansion ends and a recession begins, representing the highest level of real GDP.

Trough (business cycle)

The turning point in a business cycle when a recession ends and an expansion begins, representing the lowest level of real GDP.

Purchasing power parity (PPP) prices

Prices used to value GDP across countries to account for differences in the purchasing power of currencies, providing a more accurate comparison of living standards.

Limitations of Real GDP

Factors influencing the standard of living not captured by real GDP, such as household production, underground economic activity, leisure time, and environmental quality.

Time-series graph

A graph that measures time on the x-axis and the variable of interest on the y-axis, used to display trends and cycles.

Cycle (graphical)

A tendency for a variable in a time-series graph to alternate between upward and downward movements.

Trend (graphical)

A tendency for a variable in a time-series graph to move in one general direction over a long period.

Ratio scale

A scale on a graph where equal distances represent equal proportional changes, making it useful for visualizing constant growth rates as a straight line.