Ch2: National Economy Flashcards
National income accounts
An accounting framework that is used to measure the current economic activity
Product approach
Add market value of goods and services produced minus any goods and services used up in intermediate stages of production.
Income approach
Adding all income received by producers of output, including wages received by workers and profits received by owners of firms.
Expenditure approach
Adding the amount spent by all ultimate users of output.
3 ways to measure total value of economic activity generated
- Income approach
- Expenditure approach
- Product approach
Fundamental identity of national income accounting
Total Income = Total Expenditure = Total Production
Underground economy
- 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)
Intermediate goods and services
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.
Final goods and services
- Goods and services that are not intermediate.
- End products of a process.
Capital good
- 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.
Inventories
Stocks of unsold finished goods, goods in process, and raw materials held by firms.
Inventory investment
The amount by which inventories increase during the year.
Explain why the 3 approaches to calculating economic activity are equivalent
Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach)
Gross national product (GNP) vs Gross domestic product (GDP)
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.
Net factor payments from abroad (NFP)
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.
Income-expenditure identity
Y (income) = C + I + G + NX (expenditure)
Consumption
Spending by domestic households on final goods and services, including those produced abroad.
3 categories of consumption expenditures
- Consumer durables - long-lived consumer items
- Nondurable goods - shorter-lived items
- Services
Investment
Includes both spending for new capital goods, called
fixed investment, and increases in firms’ inventory holdings, called inventory investment.
Government purchases
Includes any expenditure by the government for a currently produced good/service, foreign or domestic.
National income
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
3 other items that need to be accounted for other than national income
- Statistical discrepancy
- Depreciation
- Net factor payments from abroad
How does statistical discrepancy occur and what is it?
- Data on income is retrieved from different sources compared to data on production.
- Production measure minus the income measure
National income plus statistical discrepancy = ?
Net national product (NNP)
Depreciation
The value of the capital that wears out during the period over which economic activity is being measured.
Private disposable income
Measures the amount of income the private sector has available to spend.
Net government income
Taxes paid by the private sector minus payments from the government to the private sector
Saving
Economic unit’s current income minus its spending on current needs
Private spending (saving of the private sector)
Private disposable income minus consumption
Private saving rate
Private saving divided by private disposable income
Government saving
Net government income minus government purchases of goods and services
Net government income
Taxes paid by the private sector minus payments from the government to the private sector
Budget surplus
Government receipts minus government outlays
Government receipts
Tax revenue
Government outlays
Sum of government purchases of goods and services, transfers and interest payments on government debt.
When government receipts < government outlays it means…
- Government budget deficit
- Government saving is negative
National saving (the saving of the economy as a whole)
Private saving plus government saving
Net government income
Taxes paid by the private sector minus payments from the government to the private sector
Net government income
Taxes paid by the private sector minus payments from the government to the private sector
Net government income
Taxes paid by the private sector minus payments from the government to the private sector
Current account balance
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.
Uses-of-saving identity
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)
National wealth
- 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
Interest rate
It is a rate of return promised by a borrower to a lender.
Real interest rate (real rate of return) on an asset
It is the rate at which the real value or purchasing power of the asset increases over time.
Nominal interest rate (or nominal rate of return)
- It is the rate at which the nominal value of an asset increases over time.
- Symbol is i
Inflation rate
Equals the percentage rate of increase in the price index per period
Expected real interest rate
Nominal interest rate minus the expected rate of inflation
