Chapter 2 Flashcards
What are the 3 approaches to national income measurement?
Production
Expenditure
Income
Why are the 3 approaches the same?
Any output produced is purchases and results in income
What is the production approach?
Capital
- goods not consumed in the process of production
- goods produced in prior periods and consumed in the process of production
Labour
- assumes single wage rate
- homogeneous good measured in hours worked
Production
- value added by employment of labour and capital during the period
What is the product approach?
Inventory investment (amount that inventories of unsold finished goods, goods in process, and raw materials have changed during the period) is treated as a final good
What is the expenditure approach?
Measures total spending on final goods and services produced within a nation during a specified period of time
Y = C + I + G + (X - M)
What is consumption?
Spending by domestic households on final goods and services
- consumer durables
- nondurable goods
- services
What is investment?
Spending for new capital goods
- volatile
- business fixed investment: spending by businesses on structures, etc.
- residential fixed investment:
spending on the construction of houses and apartment buildings
- inventory investment:
increases in firms’ inventory holdings
What is government spending?
Spending by the government on goods and services
- most by state and local governments
- not all expenditures are purchases:
- some are payments not made in exchange of goods and services
- transfers including social security payment, welfare, unemployment benefits
- interest payment on government debt
- some government spending is for capital goods that add to nation’s capital stock, such as highways, airports, bridges, etc.
What are net exports?
Exports minus imports
- exports are goods produced in the country that are purchased by foreigners
- imports are good produced abroad that are purchased by residents in the country
- imports are subtracted from GDP as they represent goods produced abroad and are included in consumption, investment and government purchases
What is private disposable income?
Private sector income earned at home + abroad + payments from the government sector - taxes
Y + NFP + (TR + INT) - T
Government’s net income = taxes - transfers - interest payments = T - TR - INT
How do you calculate national savings?
Private saving + government saving
What is wealth?
Household wealth = household’s assets minus its liabilities
National wealth = sum of all households’, firms’ and governments’ wealth
Savings by individuals, businesses and government determine wealth
How do you measure aggregate savings?
Current income - current spending
Saving rate = saving/current income
What are the uses of private savings?
Income + net exports
Does CPI inflation overstate increases in the cost of living?
Yes
Problem is that adjusting price measures for changes in quality of goods is very difficult
Price indexes with fixed sets of goods don’t reflect substitution by consumers when one goods becomes cheaper than another
- substitution bias
If inflation is overstated, the real incomes are higher than we thought and we have over-indexed payments like social security
