Unit 2: Tracking the US Economy

Expenditure Approach to GDP

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

Income Approach to GDP

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

Final Goods and Service

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 of 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 residences, which count as investment (68%).

Investment

The purchase of new plants, new equipment, new buildings, and new residences, plus net additions to inventories (16%).

Physical Capital

Manufactured items used to produce goods and services, including new plants and new equipment.

Residential Construction

Building new homes or dwelling places.

Inventories

Producers' stocks of finished and in-process goods.

Government Purchases

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

Net Exports

The value of a country's exports minus the value of its imports (-4%).

Aggregate Expenditure

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 (DI)

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

Net Taxes (NT)

Taxes minus transfer payments.

Financial Markets

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

Ex: Credit unions

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; includes savings, 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 or 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

Price Index

A number that shows the average price of products;

Consumer Price Index

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

Chain-Weighted System

An inflation measure that adjusts the weights from year to year in calculating a price index, thereby reducing the bias caused by a fixed-price weighting system.

Production

A process that transforms resources into goods and services.

Productivity

The ratio of a specific measure of output, such as a real GDP, to a specific measure of input, such as labor, in this case productivity measures real GDP per hour of labor.

Labor productivity

Output per unit of labor; measured as real GDP divided by the hours of labor employed to produce that output.

Per-worker production function

The relationship between the amount of capital per worker in the economy and the average output per worker.

Capital deepening

An increase in the amount of capital per worker; one source of rising labor productivity.

Rules of the Game

The laws, customs, manners, conventions, and other institutional elements that determine transaction costs and thereby affect people's incentives to undertake production and exchange.

Industrial Market Countries

Economically advanced capitalist countries of Western Europe, North America, Australia, New Zealand, and Japan, plus the newly industrialized Asian economies of Taiwan, South Korea, Hong Kong, and Singapore.

Developing Countries

Countries with a lower lying standard because of less human and physical capital per worker.

Basic Research

The search for knowledge without regard to how that knowledge will be used.

Applied Research

Research that seeks answers to particular questions or to apply scientific discoveries to develop specific products.

Industrial Policy

The view that the government - using taxes, subsidies, and regulations - should nurture the industries and technologies of the future, thereby giving these domestic industries an advantage over foreign competition.