Macroeconomics Unit 2

Expenditure Approach to GDP

Calculating GDP by adding up all the spending on all final goods and services predicted in the nation during the year.

Income Approach to GDP

calculating GDP by adding all earnings from resources used to produce output in the nation during the year.

Final Goods and Services

Goods and services sold to final, or end, users.

Intermediate Goods and Services

Goods and services purchased by firms for further reprocessing and resale.

Double Counting

The mistake of including both the value and intermediate products and the value of final products in calculating gross domestic product; counting the same production more than once.

Consumption

Household purchases of final goods and services, except for new residents, which count as investment. (68% of GDP)

Investment

The purchase of new plants, new equipment, new buildings, new residents, plus additions to inventories. (16% of GDP)

Physical Capital

Manufactured items used to produce goods and services, ex

Residential Construction

Building new homes or dwelling places.

Inventories

Producers stock of finished and in-process goods.

Government Purchases

Spending for goods and services by all levels of government, gov outlays minus transfer payments. (20% of GDP)

Net Exports

The value of a country’s exports minus the value of the imports (-4% of GDP)

Aggregate Expenditures

Total spending on final goods and services in an economy during a given period, usually a year. (C+I+G+X-M)

Aggregate Income

All earnings of resource suppliers in an economy during a given period, usually a year.

Value Added

At each stage of production, the selling price of a product minus the cost of intermediate goods purchased from other firms.

Disposable Income

The income households have available to spend or to save after paying taxes and receiving transfer payments.

Net Taxes

Tax minus transfer payments.

Financial Market

Banks and other financial institutions that facilitate the flow of funds from savers to borrowers.

Injection

Any spending other than by households or an income other than from resource earnings; includes investments, government purchases, exports and transfer payments.

Leakage

Any diversion of income from the domestic spending stream; including saving, taxes, and imports.

Underground Economy

Market transactions that go unreported either because they are illegal or because people involved want to evade taxes.

Depreciation

The value of capital stock used up to produce GDP of that becomes obsolete during the year.

Net Domestic Product

Gross domestic product minus depreciation

Nominal GDP

GDP based on prices prevailing at the time of production

Base Year

The year with which other years are compared when constructing an index; the index equals 100 in the base year

Price Index

A number that shows the average price of products; changes in a price index over time show changes in the economies average price level.

Consumer Price index

A measure of inflation based on the cost of a fixed market basket of goods and services.

Chain weight System

An inflation measure that adjust the weights from year to year in calculating a price index, thereby reducing the bias caused by a fixed price index

Hedonic Adjustment

Products with many different features should not be counted as one item, iPhone have infinite apps, measure GDP by value added by its features or account for free products like assigning a dollar value based on the user ($20 per hour on Insta)