Chap 3 - GDP & Economic Growth Flashcards
What is circular flow of income?
A model that illustrates both financial & real flows among the 3 sectors of the economy: business, household, & government.
SImplified economy consists of 2 sectors (no gov.)
How does financial flow work between businesses and households?
Households pay for goods & services, while businesses pay for labor services (wages, rent, etc.)
What is the difference between stock of money and flow of income?
Stock of money is quantity of money at specific pt in time.
Flow of income is amnt of income over given period of time.
What is velocity money and what is the formula for finding it?
Each time money from stock is spent, it adds to flow of income. # of times its spent in a year on final goods is called velocity of money.
= Total income or GDP / money supply.
What is a leakage and an injection? What are the differences between them?
Leakage is any flow of income thats diverted out of the circular flow & doesnt come back like savings. Injection is any spending flow that its dependent on current level of income like investing.
What is the difference between savings and investments?
Savings (S) is a portion of income (Y) thats not spent on consumption (C). Investment is adding money to circular flow, regardless of income.
S=Y-C
What is the difference between imports & exports?
Imports is when goods & services are brought to Canada in exchange for money leaving Canada (leakage).
Exports is when good & services are sent in exchange for money entering Canada (injection)
How does the circular flow of income work with the foreign sector?
Households pay foreign sectors for imports and foreign sectors pay businesses for exports.
What is the difference between taxes and government spending?
Taxes are money collected from households & businesses (leakage).
Government spending is tax revenue invested by government (injection)
How does the government fit into the circular flow of income?
The government collects taxes from households & businesses and in return spends on goods & services of businesses and transfers payment to households.
Overall, what are the 3 leakages and injections within the circular flow of income?
Leakages:
1. Savings
2. Imports
3. Taxes
Injections:
1. Investment
2. Exports
3. Gov. spending
How would the national income get affected with injections & leakages?
If injections > leakages, national income rises.
If injections < leakages, national income falls.
What is an equilibrium? What is a national income equilibrium?
Equilibrium is a state of balance between two opposing forces, with no tendency to change.
National income equilibrium is level of income where total leakages = total injections.
How would the economy get affected by injections & leakages?
If injections > leakages, economy expands (economic growth).
If injections < leakages, economy contracts (recession).
What is the value of production?
= amnt producers receive (sales rev.), which is = to total spending by buyers (aggregate expenditures).
= cost of production, including profit (which is = total factor incomes).
What is the relation between total income and aggregate expenditures in equilibrium?
In equilibrium, aggregate expenditures = total income.
What are aggregate expenditures?
It is the current value of all finished goods & services in the economy during a given time period.
What are the two ways to measuring national income?
The two ways are:
1. Expenditures approach
2. Incomes approach
How to calculate the expenditures approach to national income?
Aggregate expenditures (AE) consists of:
- Consumption (C)
- Gross Investment (Ig) = Net investment - Depreciation
- Government Spending (G)
- Net Exports (Xn or Exports - Imports [X - Im])
AE = C + Ig + G + Xn
How to calculate the incomes approach to national income?
We add up incomes of the 3 sectors: businesses, households, & govs.
In equilibrium, this total will = AE
= compensation of employees + gross operating surplus + gross mixed income + taxes (net of subsidies) on production + indirect taxes (net of subsidies)
GDP & GDI
What are the mechanics of measuring national income?
- GDP (gross domestic product), value of all final good & services produced in a period. =AE=Y
- GDI (gross domestic income), total earnings received by households, businesses, & gov. in a period of time.
What are depreciation and indirect taxes?
- Depreciation is value of existing cap. goods decrease over time. Net investment = Gross investment - Depreciation
- Indirect taxes are sales taxes that businesses collected for the government.
What is Net Domestic Product (NDP)?
Its value of production after accounting for depreciation & indirect taxes.
NDP = GDP - depreciation - indirect taxes
What is Net National Product (NNP) and how does it work?
NNP accounts for foreign corporations that operate in Canada, when some of their profit may be transferred out of the country, while some Canadians work abroad.
NNP = NDP +/- net foreign factor income
