chapter 15 macroecon

Flashcards about Gross Domestic Product based on lecture notes.

What is national income accounting?

The system used to measure the aggregate income and expenditures for a nation

What is gross domestic product (GDP)?

The market value of all final goods and services produced in a nation during a period of time, usually a year

Why is GDP important?

It tells a country how well its economy is doing.

What transactions are excluded from the calculation of GDP?

1. Secondhand transactions 2. Nonproductive financial transactions

What are examples of secondhand transactions?

• The sale of a used car • The sale of a home constructed some years ago

What are examples of nonproductive financial transactions?

• Giving private gifts • Buying and selling stocks and bonds • Making transfer payments

What is a transfer payment?

A government payment to individuals not in exchange for goods or services currently produced

What are final goods?

Finished goods and services produced for the ultimate user

What are intermediate goods?

Goods and services used as inputs for the production of final goods

Why are intermediate goods excluded from the calculation of GDP?

Including all goods and services produced would inflate GDP by double counting (counting many items more than once). In order to count only final goods and avoid overstating GDP, national income accountants must take care not to include intermediate goods.

What is the circular flow model?

A diagram showing the exchange of money, products, and resources between households and businesses

What is a flow?

A rate of change in a quantity during a given time period, such as dollars per year

What are examples of flow?

Income and consumption are flows that occur per week, per month, or per year.

What is a stock?

A quantity measured at one point in time

What are examples of stock measure?

• An inventory of goods • The amount of money in a checking account

What two approaches are used to calculate GDP?

1. Expenditure approach 2. Income approach

What is the expenditure approach?

The national income accounting method that measures GDP by adding all the spending for final goods during a period of time

What are the four components of expenditures?

1. Personal consumption expenditures 2. Gross private domestic investment 3. Government consumption expenditures and gross investment 4. Net exports

What are personal consumption expenditures?

Household spending for durable goods, nondurable goods, and services

What are durable goods?

Anything that last beyond three years, such as automobiles, appliances, and furniture

What are nondurable goods?

Anything considered used up or consumed in less than three years, such as food, clothing, and gasoline

What are services?

Any transaction not in the form of a tangible object, such as recreation, medical treatment, and education

What is gross private domestic investment?

The national income account that includes “gross” (all) “private” (not government) “domestic” (not foreign) spending by businesses for investment in capital assets that are expected to earn profits in the future

What two components make up gross private domestic investment?

1. Fixed investment expenditures for newly produced capital goods 2. Change in business inventories

What is government spending?

The value of goods and services government at all levels purchased measured by their costs

What are net exports?

The difference between exports and imports

What are exports?

Spending by foreigners for U.S. domestically produced goods

What are imports?

The dollar amount of U.S. purchases for goods produced abroad

How is GDP expressed algebraically using the expenditure approach?

GDP = C + I + G + (X – M)
where C = spending by households (personal consumption expenditures)
I = spending by firms (gross private domestic investment)
G = spending by government (government consumption expenditures and gross investment)
X = exports
M = imports

What is the income approach?

The national income accounting method that measures GDP by adding all incomes during a period of time, including compensation of employees, rents, net interest, and profits

What is compensation of employees?

Income earned from wages, salaries, and certain supplements paid by firms and government to suppliers of labor

What is rental income?

Rent and royalties received by property owners who permit others to use their assets during a time period

What two components make up profits?

1. Proprietors' income 2. Corporate profits

What is proprietors’ income?

All forms of income earned by unincorporated businesses (self- employed proprietorships and partnerships)

What are corporate profits?

All income earned by the stockholders of corporations regardless of whether stockholders receive it

What is net interest?

The difference between interest income earned and interest payments

What are indirect business taxes?

Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firm’s revenue; firms treat such taxes as production costs

What are examples of indirect business taxes?

• General sales taxes • Excise taxes • Customs duties

What is depreciation?

An allowance for the portion of capital worn out producing GDP

How is GDP expressed algebraically using the income approach?

GDP = compensation of employees + rents + profits + net interest + indirect taxes + depreciation

Why is GDP considered a less-than-perfect measure of the nation’s economic pulse?

It excludes the following factors: • Nonmarket transactions • Distribution, kind, and quality of products • Quality of life • The underground economy • Economic bads

Why are nonmarket transactions excluded from GDP?

1. It would be extremely imprecise to attempt to collect data and assign a dollar value to services people provide for themselves or others without compensation. 2. It is difficult to decide which nonmarket activities to exclude and which ones to include.

What conclusion can we make regarding the exclusion of the quality of products from GDP?

GDP is a quantitative, rather than a qualitative, measure of the output of goods and services.

What conclusion can we make regarding the exclusion of quality of life from GDP?

It can be argued that GDP understates national well-being because no allowance is made for variables such as leisure time, life expectancy, infant mortality, literacy rate, and other quality- of-life variables.

What conclusion can we make regarding the exclusion of the underground economy from GDP?

If the underground economy is sizable, GDP will understate an economy’s performance by a sizable amount.

What conclusion can we make regarding the exclusion of economic bads from GDP?

Since the costs of negative by-products are not deducted, GDP overstates the national well-being.

What are some alternative measures for GDP?

• Measure of Economic Welfare (MEW) • Genuine Progress Indicator (GPI) • Human Development Index (HDI) • Happy Planet Index (HPI)

What other national income accounts measure economic performance?

• National income • Personal income • Disposable personal income

What is national income (NI)?

The total income earned by resource owners, including wages, rents, interest, and profits

What is the formula for national income?

NI = GDP – depreciation (consumption of fixed capital)

What is personal income (PI)?

The total income received by households that is available for consumption, saving, and payment of personal taxes

What is disposable personal income (DI)?

The amount of income that households actually have to spend or save after payment of personal taxes

What is nominal GDP?

The value of all final goods based on the prices existing during the time period of production

What is real GDP?

The value of all final goods produced during a given time period based on the prices existing in a selected base year

What is the GDP chain price index?

A measure that compares changes in the prices of all final goods during a given year relative to the prices of those goods in a base year; this index is also called GDP price index or simply GDP deflator

What is the formula for real GDP?

Real GDP = (nominal GDP / GDP chain price index) × 100