Ch 9 Flashcards
Free markets work to maximize the wealth of nations through value creation. How is this value created and destroyed?
1) some of this created value is consumed quickly (such as strawberries)
2) some of this value is consumed slowly (such as with housing)
3) and some valued is saved
What are final goods?
those that are sold to a final user
What are intermediate goods?
those NOT sold to a final user
What is the definition of the GDP? (Gross Domestic Product)
current market value of all final goods produced within the countrys boarder within the last year
What is the U.S.’s GDP?
$17.3 trillion
What is not counted in the GDP?
1) Items that dont have sufficient records
2) Items that have gone down to their second owner, otherwise they would be counted twice
3) financial transactions
4) government transfer payments
5) the value of leisure
6) they dont subtract bads
What are government transfer payments?
the taking form one person and giving to another, but not in return for any good or service (ex. social security)
What are “bads”?
unwanted phenomenon, such as disease, crime and garbage
What did the Keynesians assert?
that bads may increase GDP because they increase spending because we pay to lessen their effects. (ex. police) however, they are wrong because they didn’t take in count that if there is more spending on police there would be less money to spend on items such as pizza. So it will all even out.
Whats the expenditure approach?
the usual approach in which we add up the current market values of all final goods and services
What is the income approach?
the way that the government counts the GDP; which is when you add up all the payments to factors of production (the wages, interest, rents, and profits generated by production)
When does the government gather their data?
During taxes
What makes up the Expenditure Approach?
1) consumption 70%
2) investment 15%
3) government purchases 20%
4) net exports (negative)
What is consumption?
spending by consumers on non durable goods, durable goods, and services (durable goods are those which last at least a year)
What is investment?
spending by business on capital, on changes in business inventories, and spending on new residential housing. Note this does not mention stocks or bonds
What are government purchases?
spending by all levels of government on goods and services. Note that transfer payments do no fit this definition
What are net exports?
exports - imports.
What is the real GDP?
The GDP at a fixed price according to the base year. It prevents things like inflation from effecting the output.
What is economic growth?
the percentage change in the real GDP; it is the best measure of whether the economy is progressing or regressing; it does not tell the relative well being of individuals in the economy, but the economy as a whole
What is a recession?
Two successive quarters (3 month period) of negative growth
What does our economy in the U.S. do?
It mostly grows (does not swing up or down)
What is the business cycle?
it describes the ups and downs of the economy
What is an expansion?
an increase in the real GDP
What is a peak?
When the real GDP is at a temporary high
