CH 7 Measuring & Describing Aggregate Economy Flashcards
(free exercise: look up) Circular Flow Model
Circular Flow Model
Circular Flow Model: 2 economic actors - __________ & __________
Households and Business
Circular Flow Model: 2 markets - _______ market & ________ market
Produce & resource market
Circular Flow Model: Goods and services move in one direction and _____ moves in the other direction
money
_________ accounting - measure economy by measuring
- Aggregate production
- or aggregate expenditures
- or aggregate income
Aggregate
_____ ________ _______ (GDP)
-Measures aggregate production
-The total market value of all final goods and services produced within an economy in a time period
Gross domestic product
______ _____ - not total number
-All quantities of goods and services produced are multiplied their market price per unit to determine a value measure of the good or service
Market Value
Market Value - _____ times ________
price, quantity
_____ ______, not intermediate goods
-goods and services purchased for final use
Final output
____________ ________ - used as an input in the production of some other product
intermediate products
Counting the sale of both final and intermediate goods would result in ______ counting
double
Output produced domestically or within a nation’s borders, regardless of who owns it
GDP
GNP
Gross National Product
Output from the citizens and companies of a particular nation, no matter where they are located
EX - Nike, US company, makes sneakers in Indonesia
GNP
-Total Market value of all final goods and services produced by the citizens of a country
GNP Definition
GDP is divided into four expenditure categories or components by four different economic actors:
1. ___________ (C) is spending by households on goods and services
2. ___________ (I) is spending for the purpose of additional productions - by firms when expanding
3. ___________ _________ (G) is goods and services that governments buys
4. ___ _______ is spending on exports (X) minus spending on imports (M) by other countries
- Consumption
- Investments.
- Government spending
- Net exports
Components of GDP: Consumption
Consumers or households
Components of GDP: Investments
Firms
Components of GDP: Government Spending
Government
Components of GDP: Net Exports
Other Countries
GDP Equation
GDP = C + I + G + (X - M)
What is not counted as GDP?
*Secondhand sales
*Sales of stocks or bonds (not production or service
*Government transfer payments (Social Security)
*Household labor
*Illegal activities
*Cash or informal economy
What is counted as GDP?
*Value added by a used car dealer
*Commissions paid to stockbrokers
Limits of GDP Accounting Non-market Activity a. ____ ______
Illegal activity - Drug trade
Limits of GDP Accounting Non-market Activity b. _________ _______
- paid in cash, don’t pay taxes, not licensed
informal sector
Limits of GDP Accounting Non-market Activity c. _________ ___________ - ranges from 25% - 50% of GDP
Household production
Limits of GDP Accounting Non-market Activity d. ______ ____
- does it have value
if you chose not to work so hard by working shorter hours, should we count this?
Leisure time
Limits of GDP Accounting Other Issue 1. Failure to subtract ________ ‘____’
economic ‘bads’
Most common economic bad or social cost is pollution - which is a by-product of production
Limits of GDP Accounting Other Issues 2. Failure to subtract ______ _____
social costs
Limits of GDP Accounting Other Issues 3. _________ of _______ _______
Depletion of Natural Capital
Doesn’t take into account the depletion of finite natural resources
Limits of GDP Accounting Other Issues 4. ___________ _______
-not taken into account
Qualitative changes
GDP measures the value of the good - not the quality of the good
Limits of GDP Accounting Other Issues 5. ______ ____________
Income Distribution
GDP assumes that everyone makes the same income per year, but in most countries, there is a wide range of incomes
Current GDP accounting methods does not calculate whether income inequalities are increasing or decreasing
Limits of GDP Accounting Other Issues 6. _________ or ________ well being
Happiness or Economic Well Being
GDP - measures economic market activity
Other Measures
-Instead of GDP…
Genuine Progress Indicator (GPI)
-variety of adjustments to the progress of society rather than just economic activity
* ___ includes goals such as pollution reduction, education, and health
GPI
-GDP or output divided by the total population
Per Capita GDP
-assumes that everyone makes the same income, but there may be a wide range of incomes
Limitations of Per Capita GDP
-May be a misleading measure of living standards because of differences in non market activities and product prices
Limitations of Per Capita GDP
_________ Income = Wages + Rents + Interest + Profits
Aggregate Income
_________ Income or Gross Domestic Income - total income earned by citizens and businesses in a country in a year
Aggregate
Income goes to factors of production
Wages - _____
Rent - ____
Interest - _______
Profits - ________________
Labor
Land
Capital
Entrepreneurship
Aggregate Income = Aggregate ___________
Production
Two ways to Calculate GDP
-Add up vales of final outputs or production (C, I, G, NX)
-Add up values of earnings or income (W, R, I, P)
Two ways that GDP can increase (1.)
An increase in the PRICES of goods and services
Two ways that GDP can increase (2.)
An increase in the QUANTITY of goods and services
How to determine what is affecting GDP
Use real GDP
_______ GDP is the amount of goods and services measured at current prices
Nominal
-the price in today’s dollars
Nominal
____ GDP is the total amount of goods and services produced, adjusted for inflation
Real
-The price in a base year’s dollars
Real
Calculating Nominal GDP (Step 1.)
- use current prices and current quantities for each year
Calculating Real GDP (Step 2.)
by using quantity in the current year and the price from the base year
Tells us how much GDP has changed
Growth Rate
=a percentage change in GDP
= (change in GDP/ original or old GDP)
Growth rate
-formula
-Growth Rate or % change in GDP
-GDP Growth Rate = (___ GDP - ___)/ ___ GDP
= (new GDP - old)/old GDP
- Continual rise in the overall price level
Inflation
-decrease in price level
-Negative rate
-Ex: -1% rate
Deflation
Decrease in the rate of inflation
-Inflation rate is lowered
EX: Inflation rate
Disinflation
-Measure Inflation with a _____ _____
-_____ _____ - measure of the composite prices of a specified group of goods
Price Index
________ Price Index (CPI)
Consumer
measures the prices of a fixed basket of goods, weighted according to each component’s share of an average consumer’s expenditures
Consumer Price Index (CPI)
-problem - how do you compare the quality of goods over time - laptops, phones , cars, etc.
price index that includes all goods and services in the economy
GDP Deflator
-Measures goods & services purchased by
consumers, firms, state & local governments and
foreigners
- Used to convert between nominal and real GDP
- ___ ________ – may be either expressed as 1’s or
100’s
GDP Deflator
-Real GDP = (Nominal GDP/GDP Deflator) x 100
-GDP Deflator = (Nominal GDP/ Real GDP ) x 100
(Only use 100 in formula if deflator in 100s)
GDP Deflator
-________ _____ _____ (PPI) An index of prices that measures the average change in the selling prices received by domestic producers of goods and services over time
-Producer’s perspective
-Can predict consumer inflation if producers’ cost of inputs go up
Producer Price Index
