Economics Exam Study Guide

National Income Accounting measures the national economy’s performance by dealing with the overall output and income of an economy.
Five major statistics are used: Gross Domestic Product (GDP), Net Domestic Product (NDP), National Income (NI), Personal Income (PI), and Disposable Personal Income (DPI).

GDP is the total dollar value of all final goods and services produced in a nation in a single year.
It represents the amount of goods and services produced within a country in a year, expressed in dollars.
Economists use the final value of goods and services to avoid double counting.
Only new goods are counted; the sale of secondhand items is excluded from GDP.
GDP is determined by adding four categories:
- Consumer sector: Goods and services bought directly by consumers.
- Investment sector: Business purchases of items used to produce other goods.
- Government sector: Goods and services bought by the government.
- Net Exports: The difference between a nation’s exports and imports.

Depreciation is the loss of value of durable or capital goods due to wear and tear.
NDP measures the economy by accounting for depreciation, which GDP does not.
NDP is calculated by subtracting depreciation from GDP.

Economists examine GDP, NDP, National Income, Personal Income, and Disposable Personal Income.
National Income (NI) is the total income earned by everyone in the economy, including labor and income from ownership of production factors.
NI includes wages and salaries, income of self-employed individuals, rental income, corporate profits, and interest on savings and investments.
Personal Income (PI) is the total income individuals receive before personal taxes.
- PI is derived by subtracting corporate income tax, reinvested profits, and employer social security contributions from national income.
Transfer payments, such as welfare, food stamps, and social security, are included in personal income, even without current productive activity.
Disposable Personal Income (DPI) is the income people have after taxes, including social security contributions.
$DPI = PI - Personal Taxes$
DPI indicates the economy's health by showing actual money available to be spent or saved.

GDP can be misleading if inflation is not taken into account.
Inflation is a prolonged rise in the general price level of goods and services.
Inflation reduces purchasing power, meaning a dollar buys fewer goods and services.
Deflation is a prolonged decline in the general price level of goods, affecting the dollar value of GDP (rare in modern times).
The Consumer Price Index (CPI) measures the average price of a set of goods purchased by consumers in urban areas.
A market basket, updated every 10 years, represents these goods and services.
The Bureau of Labor Statistics (BLS) compiles the CPI monthly, using prices from a base year for comparison.
The Producer Price Index (PPI) measures the average change in prices that U.S. producers charge their customers, mainly in mining, manufacturing, and agriculture.
GDP price deflator removes the effect of inflation from GDP, allowing comparison of the overall economy between years.
Real GDP is the GDP adjusted for inflation using the price deflator.
The formula to calculate real GDP is: $Real GDP = \frac{Nominal GDP}{Price Deflator} * 100$
The federal government uses 2005 as the base year to measure GDP and convert nominal GDP to real GDP.

Demand is the amount of a good or service consumers are willing and able to buy at various prices during a specific time.
Supply is the amount of a good or service producers are willing and able to sell at various prices during a specified time.
A market is the process of freely exchanging goods and services between buyers and sellers.
In a market economy, individuals decide what, how, and for whom to produce.
Buyers and sellers work toward satisfactory terms of exchange.

Buyers have a choice in spending their income.
Supply and demand analysis models how buyers and sellers operate in the marketplace.
The law of demand states that the quantity demanded and price move in opposite directions i.e. inverse relationship.
Quantity demanded is the amount a consumer is willing and able to purchase at a specific price.
Real Income effect: Individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same.
Substitution effect: If two items satisfy the same need and the price of one rises, people will buy more of the other.
Utility is the ability of a good or service to satisfy customer wants.
Marginal Utility: Additional satisfaction declines with each additional unit purchased.
Law of diminishing marginal utility: The additional satisfaction of purchasing one more unit of a product will lessen with each additional unit purchased.
The law of supply and demand can be applied to the economy as a whole as well as to the individual consumer decisions.