Ch2: National Economy

Question 1

National income accounts

Answer 1

An accounting framework that is used to measure the current economic activity

Question 2

Product approach

Answer 2

Add market value of goods and services produced minus any goods and services used up in intermediate stages of production.

Question 3

Income approach

Answer 3

Adding all income received by producers of output, including wages received by workers and profits received by owners of firms.

Question 4

Expenditure approach

Answer 4

Adding the amount spent by all ultimate users of output.

Question 5

3 ways to measure total value of economic activity generated

Answer 5

• Income approach
• Expenditure approach
• Product approach

Question 6

Fundamental identity of national income accounting

Answer 6

Total Income = Total Expenditure = Total Production

Question 7

Underground economy

Answer 7

• Partially incorporated in official GDP measures.
• Involves both legal activities kept away from government record keepers (to avoid taxation or compliance with regulations) and illegal activities (e.g. drug dealing, prostitution and gambling)

Question 8

Intermediate goods and services

Answer 8

It is goods or services that have been used during the production of other goods or services that were also produced in the same period.

Question 9

Final goods and services

Answer 9

• Goods and services that are not intermediate.
• End products of a process.

Question 10

Capital good

Answer 10

• It is a good that is produced and is used to produce other goods.
• It is not used up in the same period that it is produced.
• Classified as a final good, thus, their production is included in GDP.

Question 11

Inventories

Answer 11

Stocks of unsold finished goods, goods in process, and raw materials held by firms.

Question 12

Inventory investment

Answer 12

The amount by which inventories increase during the year.

Question 13

Explain why the 3 approaches to calculating economic activity are equivalent

Answer 13

Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach)

Question 14

Gross national product (GNP) vs Gross domestic product (GDP)

Answer 14

GNP is the market value of final goods and services newly produced
by domestically owned factors of production during the current period, whereas GDP is production taking place within a country.

Question 15

Net factor payments from abroad (NFP)

Answer 15

Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy.

Question 16

Income-expenditure identity

Answer 16

Y (income) = C + I + G + NX (expenditure)

Question 17

Consumption

Answer 17

Spending by domestic households on final goods and services, including those produced abroad.

Question 18

3 categories of consumption expenditures

Answer 18

1. Consumer durables - long-lived consumer items
2. Nondurable goods - shorter-lived items
3. Services

Question 19

Investment

Answer 19

Includes both spending for new capital goods, called
fixed investment, and increases in firms’ inventory holdings, called inventory investment.

Question 20

Government purchases

Answer 20

Includes any expenditure by the government for a currently produced good/service, foreign or domestic.

Question 21

National income

Answer 21

It is the sum of 8 types of income:
1. Compensation of employees
2. Proprietors’ income
3. Rental income of persons
4. Corporate profits
5. Net interest
6. Taxes on production and imports
7. Business current transfer payments (net)
8. Current surplus of government enterprises

Question 22

3 other items that need to be accounted for other than national income

Answer 22

1. Statistical discrepancy
2. Depreciation
3. Net factor payments from abroad

Question 23

How does statistical discrepancy occur and what is it?

Answer 23

• Data on income is retrieved from different sources compared to data on production.
• Production measure minus the income measure

Question 24

National income plus statistical discrepancy = ?

Answer 24

Net national product (NNP)

Question 25

Depreciation

Answer 25

The value of the capital that wears out during the period over which economic activity is being measured.

Question 26

Private disposable income

Answer 26

Measures the amount of income the private sector has available to spend.

Question 27

Net government income

Answer 27

Taxes paid by the private sector minus payments from the government to the private sector

Question 28

Saving

Answer 28

Economic unit’s current income minus its spending on current needs

Question 29

Private spending (saving of the private sector)

Answer 29

Private disposable income minus consumption

Question 30

Private saving rate

Answer 30

Private saving divided by private disposable income

Question 31

Government saving

Answer 31

Net government income minus government purchases of goods and services

Question 32

Net government income

Answer 32

Taxes paid by the private sector minus payments from the government to the private sector

Question 32

Budget surplus

Answer 32

Government receipts minus government outlays

Question 33

Government receipts

Answer 33

Tax revenue

Question 34

Government outlays

Answer 34

Sum of government purchases of goods and services, transfers and interest payments on government debt.

Question 35

When government receipts < government outlays it means…

Answer 35

• Government budget deficit
• Government saving is negative

Question 36

National saving (the saving of the economy as a whole)

Answer 36

Private saving plus government saving

Question 37

Net government income

Answer 37

Taxes paid by the private sector minus payments from the government to the private sector

Question 38

Net government income

Answer 38

Taxes paid by the private sector minus payments from the government to the private sector

Question 39

Net government income

Answer 39

Taxes paid by the private sector minus payments from the government to the private sector

Question 40

Current account balance

Answer 40

It equals payments received from abroad in exchange for currently produced goods and services minus the analogous payments made to foreigners by the domestic economy.

Question 41

Uses-of-saving identity

Answer 41

States that an economy’s private saving is used in three ways:
1. Investment (I)
2. The government budget deficit (-S_govt)
3. The current account balance (CA)

Question 42

National wealth

Answer 42

• It is the total wealth of the residents of a country.
  Consists of two segments 1. the country’s domestic physical assets
  2. its net foreign assets

Question 43

Interest rate

Answer 43

It is a rate of return promised by a borrower to a lender.

Question 44

Real interest rate (real rate of return) on an asset

Answer 44

It is the rate at which the real value or purchasing power of the asset increases over time.

Question 45

Nominal interest rate (or nominal rate of return)

Answer 45

• It is the rate at which the nominal value of an asset increases over time.
• Symbol is i

Question 46

Inflation rate

Answer 46

Equals the percentage rate of increase in the price index per period

Question 47

Expected real interest rate

Answer 47

Nominal interest rate minus the expected rate of inflation