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Chapter 7 - GDP
Macroeconomics: GDP
56
Economics
Undergraduate 1
02/28/2009

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Term
Microeconomics
Definition
Study of how households and firms make choices, interact in markets, and how to government attempts to influence their choices.
Term
Macroeconomics
Definition
Study of economy as a whole - inflation, unemployment, and economic growth.
Term
Business Cycle
Definition
Alternating periods of expansion and recession.
Term
Expansion
Definition
TOTAL Production and TOTAL Employment are increasing.
Term
Recession
Definition
TOTAL Production and TOTAL Employment are decreasing.
Term
Economic Growth
Definition
The ability of an economy to produce INCREASING QUANTITIES of GOODS and SERVICES.
Term
Inflation Rate
Definition
Percentage INCREASE in AVERAGE level of prices from one year to another.
Term
Gross Domestic Product
Definition
Measures total production and income.
Term
GDP is the market value of...
Definition
All FINAL goods and services produced INSIDE a country.

Only includes current productions; no used goods.
Term
Who measures GDP?
Definition
Bureau of Economic Analysis (BEA)
Term
GDP is measured in...
Definition
Values (in dollar terms) rather than quantities (in numerical terms).
Term
Final Good or Service
Definition
One purchased by FINAL USER and not included in the production of any other good or service.

Ex: Personal Computer or a Burger
Term
Intermediate Good or Service
Definition
One used as an INPUT into another good or service.

Ex: A tire to a truck
Term
GDP is the SIMULTANEOUS measurement of what two values?
Definition

TOTAL Production and TOTAL Income

 

Value of goods sold = Total value of income

 

Ex: Money spent on a product will dissipate into someone's pockets.

 

"EVERY PENNY MUST END UP AS SOMEONE'S INCOME."

Term
Firms sell goods and services to which three groups?
Definition

Domestic households

 

Foreign Firms and Households

 

The Government

Term
Exports are...
Definition
Expenditures BY foreign firms and households ON domestically produced goods and services.
Term
Firm
Definition
An organization that produces a good or service.

Most firms produce for profit, but there are also non-profit firms (e.g. universities, churches).
Term
Household
Definition
The basic residential unit in which economic production and consumption take place.

A person or group of persons living in the same residence.

Government uses term synonymously with 'family'.
Term
Factors of Production
Definition
Labor, capital, natural resources, and entrepreneurship.
Term
Households supply ______ to firms in exchange for income.
Definition
The factors of production: labor, capital, natural resources, and entrepreneurship.
Term
The four divisions of income.
Definition

Wages: firms pay wages to households in exchange for labor.

Interest: for the use of capital.

Rent: for natural resources such as land.

Profit: the income that remains AFTER a firm has paid WAGES, INTERESTS, and RENT.

Term
Profit
Definition
The INCOME that REMAINS after a firm has paid wages to households, interest for capital, and rent for natural resources.
Term
Transfer payments
Definition
Payments by the government to individuals for which the government does not receive a new good or service in return.

NOT INCLUDED IN GDP; NO EXCHANGE FOR NEW GOODS OR SERVICES.
Term
Imports are...
Definition
Spending on foreign-produced goods and services.
Term
What makes up the financial system?
Definition
Banks and Stock & Bond markets.
Term
Ways to calculate GDP
Definition
Adding up total expenditures of the three groups firms sell goods and services to: domestic households, foreign firms and households, and the government.

Calculating the total income received by households.

Total production of goods and services of firms.
Term
Household income is spent on...
Definition

Goods and Services (Services, Durable, and Non-Durable Goods)

 

Foreign goods and services (imports)

 

Paying government taxes

 

Deposited in checking or savings accounts

 

Buy stocks and bonds

Term
What makes up the financial system?
Definition
Banks and Stock & Bond Markets.
Term
What is the importance of the financial market?
Definition

It allows the government and firms to borrow money.

 

Without the ability to borrow funds, firms will have a difficult time expanding and adopting NEW technologies.

Term
What are the four major categories of expenditures?
Definition
Consumption, Investment, Government Purchases, and Net Exports
Term
Consumption?
Definition
Spending by households on goods and services, not including spending on new houses.

Divided into:
SERVICES (health care)
NON-DURABLE GOODS (food, clothes)
DURABLE GOODS (cars, furniture)
Term
Investment
Definition
Spending by firms on new factories, office buildings, machinery, and additions to inventory.
Spending by households on houses.
Term
The three divisions of investment?
Definition
BUSINESS FIXED INVESTMENT - spending by firms on new factories, office buildings, and machinery used to produce goods.

RESIDENTIAL INVESTMENT - spending by households and firms on houses.

CHANGES IN BUSINESS INVENTORIES - goods that are produced but have not yet been sold.
Term
Government Purchases
Definition

One of the four components of calculating GDP.

 

The spending by federal, state, and local governments on goods and services.

Term
Net Exports
Definition

Exports minus imports.

 

(Money spent on imports goes to consumption, but the values of those imports are compensated for by subtracting it from GDP.)

Term
GDP Formula
Definition
Y = C + I + G + NX
Term
Value Added
Definition

The market value a firm adds to a product.

 

The price for which a firm sells a good - the intermediate goods = Value Added

 

Total sum of values added = GDP

Term
The two types of productions not included in the calculation of GDP
Definition

Household Production Production 

 &

Underground Economy Production

Term
Household Production
Definition
Goods and services people produce for themselves.
Term
Underground Economy
Definition
Buying and selling goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.
Term
The underground economy can be referred to as the...
Definition
Informal Sector.

As opposed to the formal sector in which output of goods and services is measured.
Term
Shortcomings of GDP as a Measure of Well-Being
Definition

1. The value of leisure is not included in GDP.

 

2. GDP is not adjusted for pollution or other negative effects of production.

 

3. GDP is not adjusted for crime and other social problems (ex: increases in crime may increase spending in protection, thus increasing GDP).

 

4. GDP does not equally distribute increases of productions and services.

Term
Nominal GDP
Definition
The value of final goods and services evaluated at current-year prices.

Calculated by summing the current values of final goods and services.
Term
Real GDP
Definition
The value of final goods and services evaluated at base-year prices.

Calculated by designating a particular year as the base year and then using the prices of goods and services in all other years.
Term
Average Price (Year 1) + Average Price (Year 2)

Average Price (Year 2) + Average Price (Year 3)

What kind of method of calculation is this?
Definition
Calculating real GDP with 'CHAINED DOLLARS'.
Term
Price level
Definition
A measure of the average prices of goods and services in the economy.
Term
GDP Deflator
Definition
A measure of the price level.

Nominal GDP/Real GDP x 100 =
Term
GNP
Definition
Gross National Product

Value of final goods are services produced by residents of the U.S., even if production is OUTSIDE U.S. borders.
Term
NNP
Definition

Net National Product

 

GNP minus depreciation (run-down machinery, equipment, buildings).

Term
National Income
Definition
"Net national product minus sales taxes"

National Income (Total income) < GDP (Total production) because government taxes are subtracted from income.
Term
National Income
Definition
"Net national product minus sales taxes"

National Income (Total income) < GDP (Total production) because government taxes are subtracted from income.
Term
Personal Income
Definition
Income received by households.

Subtract corporation earnings not paid to households.
Add transfer payments from government.
Term
Disposable Personal Income
Definition
Personal income minus personal tax payments.

Best measure of the income households actually have to spend.
Term
Gross Domestic Income
Definition
GDP calculated as the sum of income payments to households.
Term
Components of Gross Domestic Income
Definition

Wages (Largest Component)

 

Interest

 

Rent

 

Profits

 

Minor things: indirect business taxes, depreciation, and "statistical discrepancy" for measurement problems. 

Term
Double Counting
Definition
Including intermediate good values in GDP, as opposed to including just final good values.
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