Ch. 2 Flashcards
3 approaches to national income accounting
product, income, expenditure
all 3 are identical measurements of econ activity
product approach
adds market value of good produced, excluding goods used up in intermediate production stages
value-added concept
in product approach, sums value added rather than output
value added of producer = value of output - value of inputs it purchased from other producers
income approach
adds income received by producers of output, including wages received by workers & profits received by firm owners
expenditure approach
adds amount spent by all ultimate users of output
fundamental identity of national income accounting
total production = total income = total expenditure
market value –> product & expenditure must be equal
what seller receives = what buyers spend –> expenditure & income must be equal
GDP
market value of final goods newly produced in a nation during a fixed period of time, taking place WITHIN a country
why use market value for GPD?
takes into account differences in economic importance of different goods (allows adding production of different goods)
problems with using market values for GDP?
some nonmarket goods are ignored (ex. underground econ)
GNP
market value of final goods newly produced by DOMESTIC factors of production
NFP
net factor payments from abroad
GNP - GDP
income paid to domestic FOP by world - income paid to foreign FOP by domestic econ
GDP =
GNP - NFP
income-expenditure identity
Y = C + I + G + E
I =
spending for new capital goods, increases in inventory holdings, business fixed investment ( buildings, equip), residential (houses, apartments
G =
any gov expenditure for currently produced foreign/domestic good, DOES NOT include payments on national debt or transfers (bc transfers aren’t an exchange for a good)
GDP under income approach =
added incomes received by producers (including profits) + taxes paid to gov
private disposable income =
Y + NFP + TR + INT - T
net gov income =
T - TR - INT
private disposable income + net gov income =
= Y + NFP
= GNP
saving rate
saving/income
private saving
= private disposable income - consumption
= (Y + NFP - T + TR + INT) - C
government saving
= net gov income - gov purchases
= (T - TR - INT) - G
why is I not subtracted from private saving?
bc I is used to enhance future productivity instead of satisfying current needs
national saving
= Y + NFP - C - G
uses of private saving
fund new capital investment, provide resources for gov to finance budget deficits, acquire assets from or lend to foreigners
current account balance
= NX + NFP
payments received from abroad in exchange for currently produced goods - analagous payments made to foreigners by domestic econ
private saving =
I + (- Sgov) + CA
national wealth consists of
- country’s domestic physical assets
- net foreign assets
domestic financial assets held by domestic residents NOT a part of national wealth
net foreign assets =
country’s foreign assets - foreign liabilities
