Chapter 2 Flashcards
Define : National income accounts
An accounting framework used in measuring current economic activity
What are different measurements of economic activity
- Product approach
- Income approach
- Expenditure approach
Product approach measures economic activity by
Adding the market values of goods and services produced, excluding any goods or services used up in the intermediate stages of production
Which approach computes economic activity by summing the value added ?
Product approach
Value added derivation
Value of its output - the value of input purchased from other producers
Income approach measures Economic activity by
Adding all income received by producers of output
Expedinture approach measures economic activity by
Adding the amount spent by all ultimate users of output
Before tax profit
Profit with tax included
If before tax profit = revenues - wages then total income in an economy equals
(Assuming that there are no other expenses)
Total income = wages + before tax profit
What is the Broadest, best-known and most often used measure for aggregate economic activity
GDP
Calculating the gross domestic product using the product approach is defined as
The market value of final goods and services newly produced within a nation during a fixed period of time
The price at which goods and services are sold is referred as
Market value
What are the main drawback of using Market value in calculating GDP
Excludes Non-market goods and services
Examples of non-market goods and services
- Homemaking and Child care
- Natural Resources Depletion and Pollution
- Underground economy
- legal activities
- illegal activities
- Services provided by the government
Gross Domestic Product
The broadest, best-known and most often used measure for aggregate economic activity
GDP can be derived by 3 approaches these are
- Product approach
- Expedinture approach
- Income approach
Define Product approach
Its the market value of final goods and services newly produced within a nation during a fixed period of time
Final goods and services are ____________
End products of a process
Intermediate goods and services are
Used up in the production of other goods and services in the same period they were themselves produced
Example of intermediate goods and services
Flour used in producing bread and it’s delivery service
Capital goods
A capital good is a good that itself produced and is used to produce other goods, but it’s not used up in the same period it is produced in.
Inventory
Are stocks of unsold finished goods, goods in process and raw materials held by firms.
______________ is the amount by which inventory increases (decreases) during the year
Inventory investment
Which technique automatically excludes intermediate goods form the measure of output
Value-added technique
Gross National Product is
The market value of final goods and services produced by domestic factors of production during the current period
GNP =
GDP + NFP
Net Factor payments (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
Expenditure Approach
Total spending on final goods and services produced within a nation during a specific period of time
Income expenditure identity
What is the formula
Y = C + I + G + NX
In the expenditure approach, consumption is
The spending by domestic households on final goods and services including those produced abroad.
Consumption of goods can be classified as
- Durables
(Long lived consumer items) - Non durables
(Shorter-lived consumer items) - Services
In the expenditure approach, Investment includes
Both fixed investment “spending for new capital goods and depreciation” and inventory investment.
Fixed investment includes
- Business fixed investment
- Residential investment
Business fixed investment
Structures, equipment and intellectual property products
Residential investment
Construction of new houses and apartment buildings
Using the expenditure approach, government purchases of goods and services includes
any expenditure by the government for a currently produced good or service either foreign or domestic
Government purchases of goods and services excludes
- Transfer
- Interest payments on national debts
Government payments for social security is an example of
Transfers
Net exports
Exports - Imports
Exports are
The goods and services produced within a country that are purchased by foreigners
Imports are
The goods and services produced abroad that are purchased by a country’s residents
Income approach calculates GDP by
Adding up the income provided by producers, including profits and taxes paid to government.
Income approach is divided into
- Compensation of employees
- Proprietors income
- Rental income of persons
- Corporate profits
- Net interest
- Taxes on production and imports
- Business current transfer payments
- Current surplus of government enterprises
Self-employment, is it included in compensation of employees?
False
Rental income from assets can be classified into
- Tangible
- Intangible
Net interests is equal to
Interest received - interest paid
Statistical discrepancy is equal
Production measure of output (NNP) - income measure of output (NI)
NNP is equal
NI + Statistical discrepancy
Statistical discrepancy is positive when
Income measure < production measure
Depreciation is
The value of capital wears out during the period over which economic activity is measured.
Depreciation is added on what to calculate GNP
NNP
Net Factor payments is equal
GNP - GDP
Private disposable income is
The income of the private sector
Private disposable income measures
The amount of income the private sector is available to spend
Private disposable income
Y + NFP + TR + INT -T
( Where TR represents transfers from government and T as direct taxes)
Net government income is
The net income of the government sector
Net government income is equal to
GNP - Private Disposable Investment
Short form of the Net government income
Net government income = T- TR -INT
Private disposable income plus Net government income
= Y + NFP = GNP
Wealth is equal
Assets - liabilities
Wealth measures
The economic well-being of the underlying economic unit
National wealth measures
The wealth of an entire nation
Rate of saving is an important determinant of
Wealth
Saving of an economic agent equals
Current income - spending on current needs
Saving rate of an economic agent is
Its savings / its income
The three measures of saving are
1.Private saving
2.Government saving
3.National saving
Private saving is the saving of
The private sector
Private saving equals
Private disposable income - consumption
The equation of private saving
S(pvt)=(Y+NFP-T+TR+INT)-C
Private saving rate is
Private saving / private disposable income
Government saving is
Net government income - government purchases of goods and services
Government saving equation
S(gvt)=(T-TR-INT)-G
Government savings is the same as
Government budget surplus
Budget surplus equals
Government receipts - government outlays
National saving is
The saving of the economy as a whole
National saving equals
Private saving + government saving
The equation of national savings
S=S(pvt)+S(gvt)
Expanded equation of national saving
S=Y+NFP-C-G
National saving equals
Total income of the economy - spending to satisfy current needs
Uses of private saving
Private saving is used to fund new capital investment, finance budget deficit and acquire assets from or lend to foreigners
The following equation comes from
S=I+(NX+NFP)
S=Y+NFP-C-G ===>
S=(C+I+G+NX)+NFP-C-G
Current account balance equals
(NX+NFP)
Current account balance is
Payment received from abroad - payment need to foreigners in exchange for goods and services
In this equation S=I+(NX+NFP), (NX+NFP) is
Current account balance
This equation S=I+CA is for _______
private saving
If S=S(pvt)+S(gvt) then S(pvt) equals
S-S(gvt)
An expanded equation of S(pvt)=S-S(gvt)
S(pvt)=I+(-S(gvt))+CA
-S(gvt) is
Government budget deficit
Investment (I) is
Construction and purchase of new capital and inventory investment
Government budget deficit is
To cover difference between outlays and receipts
Current account balance finance
The difference between borrowing or lending
___________ variables are measured per unit of time
Flow
___________ Variables are defined at a point in time
Stock
Flow variable is the rate of change in a
Stock variable
Wealth of a nation is called its
Net worth
Wealth is a ______ while saving is a _________
Stock, flow
Saving shows
The accumulation of assets or reduction in liabilities
Domestic physical assets are
Stock of capital goods and land
Net foreign assets are equal to
Foreign asset (owned by domestic residents) - foreign liabilities (domestic assets owned by foreigners)
Net foreign assets represent
Claims on foreigners that are not offset by foreigner’s claims on domestic economy.
Net foreign assets include
Both physical and financial assets
Why domestic financial assets held by domestic residents are excluded from national wealth
Since it only involves changing ownership but there is no increase in assets
National wealth changes in two ways
1.Changing the value of assets or liabilities
2.Change in the national saving
Changes in the value of assets or liabilities can happen of
1.An increase in stock prices
2.Wearing out or depreciation of physical assets
Types of variables
- Nominal variables
- Real variables
Nominal variables are measured in terms of
Current market values
Real variables are measured in terms of
Prices of a base year
Which type of variable adjust for price changes
Real variables
Real GDP is called
constant-dollar GDP
Real GDP measures
The physical volume of an economy’s final production using the prices of a base year
Nominal GDP “current – dollar GDP” is
the dollar value of an economy’s final output measured at current market prices
Chain weighted indexes are sometimes used to measure
Real GDP
Growth rate of real GDP computed using chain weighted real GDP is
A sort of average growth rate of real GDP computed using year 1 as the base year and the growth rate computed using year 2 as the base year
Which type of average growth rate of real GDP effectively updates base year automatically
Chain-weighting
A price index is
A measure of the average level of prices for some specified set of goods and services, relative to the prices in a specified base year
The two most known Price Indexes
- GDP deflator
- Consumer Price
Index (CPI)
GDP Deflator is
a price index that measures the overall level of prices of goods
and services included in the GDP
GDP deflator is the amount by which nominal GDP must be
divided or deflated
to obtain real GDP
GDP Deflator derivation fromula
100 *(NominalGDP/ RealGDP)
If GDP Deflator = 100 * (Nominal GDP ÷ Real GDP) then the RealGDP equals
Nominal GDP ÷ (GDPDeflator / 100)
In the base year, real GDP equals
nominal GDP
since GDP deflator = 100
Consumer Price Index (CPI) is
a price index that measures the prices of consumer goods
The derivation formula of the CPI equals
(Current Cost of a Basket of Consumer Items ÷ Cost of the Same Basket in the Reference Base Year ) * 100
Why does the CPI require the use of a reference base period
for comparing prices
over time
Why does the CPI require the use of a expenditure base period
for determining the
basket of goods used in the index
The inflation rate equals
The percentage increase in the price index per period
inflation rate derivation formula
((Pt+1 – Pt) / Pt) * 100
Which price index is used by policy makers to determine the effect of a certain policy change
CPI
Which price index is used to determine the cost of living
CPI
Why the CPI can sometimes overstate inflation
List several reasons why this could happen
- Fails to adjust to substitution effect
- Does not reflect price changes in
new technology goods - Influenced by uncontrolled
price fluctuations
Substitution effect refers to Changes in the basket of goods and services
Core CPI is the CPI after excluding
commodities with volatile prices
Core CPI is either measured by
excluding selected items with volatile prices or by statistically ruling out extreme individual price movements
Which CPI reflects a more accurate measure for cost of living
CPI inflation or core inflation
CPI inflation
Interest rate is
a rate of return promised by a borrower to a lender
Interest rates is also known as
the rate of return on capital
Real interest rate of an asset is
Define the real rate of return
the rate at which the real value or the purchasing power of the asset increases over time
Nominal interest rate is
Define nominal rate of return
The rate at which the nominal value of an asset increases overtime
Real interest rate derivation formula
Nominal Interest Rate (i) – Inflation (π)
The Expected Real Interest Rate is
The nominal interest rate minus the expected rate of inflation
r = i – (π^e)
