Economic Today Measuring the Economy’s Performance

What is the underground economy?

The underground economy is the value of expenditures on final goods and services that are not included in official measures of a nation’s production.

What are the two principles of the circular flow of income?

(1) In every economic exchange, the seller’s receives the exact same amount that the buyer spends.

(2) Goods and services flow one way while money payments flow the other way.

Why is profit considered a cost of production?

Profit is the return entrepreneurs receive for taking risks in organizing production activities

Briefly explain the Circular Flow of Income ands Product

See pg 9 in miller powerpoint

What are product markets and factor markets?

Product markets are where households buy goods and services, while factor markets are where businesses buy resources like labor, land, and capital.

What is total income?

The yearly amount earned by the nation’s resources (factors of production) including wages, rent, interest payments, and profits received by workers, landowners, capital owners, and entrepreneurs, respectively

What are final goods and services?

Goods and services that are at their final stage of production and will not be used to make other goods or services.

Why must total output equal total income?

Every expenditure is also someone else’s receipt, so the dollar value of output always equals the dollar value of income.

What is national income accounting?

A measurement system used to estimate a nation’s income and its components.

What is Gross Domestic Product (GDP)?

GDP is the total market value of all final goods and services produced by factors of production located within a nation’s borders in a given year/ time period

–GDP measures the dollar value of final output.

What transactions are excluded from GDP?

Intermediate goods, financial transactions (stocks, bonds, transfers), secondhand sales, household production, and underground (legal/illegal) activities.

What are the limitations of GDP?

• It excludes nonmarket production,

• does not measure well-being of a nation

What is the expenditure approach to calculating GDP?

Adding up the value of all final goods and services using the formula: GDP = C + I + G + X, where C = consumption, I = investment, G = government spending, and X = net exports (total exports – total imports).

C+I+G+X((total exports – total imports)

What is Gross National Product (GNP)?

GNP measures the value of the final goods and services using factors of production that a nation’s residents operate outside of its borders.

It excludes the portion of the GDP produced within a nation’s borders but owned by foreigners.

What is Net Domestic Product (NDP)?

• The amount that businesses would have to save to take care of deteriorating equipment.

• Calculated as NDP = GDP – depreciation

What is the income approach to measuring GDP?

It comes from calculating the Gross Domestic Income (GDI) which is the sum of wages, rent, interest, and profits, plus indirect business taxes and depreciation.

GDI = W+I+R+P

GDP = GDI + Indirect Business Taxes + Depreciation

Indirect Business Taxes and Depreciation are known as non-income expense items.

What is National Income (NI)?

The total of all factor payments to resource owners (wages, rent, interest, profits).

What is Personal Income (PI)?

The total income households actually receive before personal taxes are deducted.

What is Disposable Personal Income (DPI)?

The income households have left after paying personal income taxes, available for spending or saving.

What is the difference between nominal GDP and real GDP?

Nominal GDP is measured at current market prices, while real GDP is adjusted for inflation using constant dollars.

What is constant dollars?

Dollars expressed in terms of real purchasing power

How do you calculate Real GDP?

Real GDP = Nominal GDP / Price Index x 100

Where price index = Current year expenditure / Base year expenditure x 100

How do you calculate inflation?

Price Index - 100

How do you calculate Per capita real GDP?

Per capita real GDP = Real GDP / Population

What is the foreign exchange rate?

The price of one currency in terms of another

What is purchasing power parity (PPP)?

An adjustment to exchange rates that accounts for differences in the cost of living between countries, allowing better comparisons of real income.

Why is the underground economy a problem for GDP measurement?

Because it involves unreported transactions, GDP underestimates the true level of economic activity.