Chapter 2 - Abel Flashcards
national income accounts
are an accounting framework used in measuring current economic activity
product approach
measures economic activity by adding the market values of goods and services produced, excluding any goods and services used up in intermediate stages of production. This approach makes use of the value- added concept
value added
the value of its output minus the value of the inputs it purchases from other producers
income approach
measures economic activity by adding all income received by producers of output, including wages received by workers and profits received by owners of firms
expenditure approach
measures activity by adding the amount spent by all ultimate users of output
fundamental identity of national income accounting
Because of the equivalence of the three approaches, over any specified time period
total production = total income = total expenditure, (2.1)
where production, income, and expenditure all are measured in the same units (for example, in dollars)
gross domestic product (GDP)
the market value of final goods and services newly produced within a nation during a fixed period of time
underground economy
includes both legal activities hidden from govern- ment record keepers (to avoid payment of taxes or compliance with regulations, for example) and illegal activities such as drug dealing, prostitution, and (in some places) gambling
Intermediate goods and services
are those used up in the produc- tion of other goods and services in the same period that they themselves were pro- duced.
Final goods and services
are those goods and services that are not interme- diate. Final goods and services are the end products of a process
capital good
a good that is itself produced (which rules out natural resources such as land) and is used to produce other goods; however, unlike an intermediate good, a capital good is not used up in the same period that it is produced
Inventories
are stocks of unsold finished goods, goods in process, and raw materials held by firms
gross national product
is the market value of final goods and services newly pro- duced by domestic 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. Using this concept, we express the relationship between GDP and GNP as
GDP = GNP - NFP.
income–expenditure identity
With these symbols, we express the expenditure approach to measuring GDP as Y = C + I + G + NX.
Equation is one of the basic relationships in macroeconomics and is also called the income–expenditure identity because it states that income, Y, equals total expenditure, C + I + G + NX
Consumption
is spending by domestic households on final goods and services, including those produced abroad
Consumption expenditures
- consumer durables, which are long-lived consumer items, such as cars, televi- sions, furniture, and major appliances (but not houses, which are classified under investment);
- nondurable goods, which are shorter-lived items, such as food, clothing, and fuel; and
- services, such as education, health care, financial services, and transportation.
Investment
includes both spending for new capital goods, called fixed investment, and increases in firms’ inventory holdings, called inventory invest- ment.
Fixed investment
- business fixed investment, which is spending by businesses on structures (facto- ries, warehouses, and office buildings, for example) and equipment (such as machines, vehicles, computers, and furniture) and software; and
- residential investment, which is spending on the construction of new houses and apartment buildings. Houses and apartment buildings are treated as capital goods because they provide a service (shelter) over a long period of time.
Government purchases of goods and services
, which include any expenditure by the government for a cur- rently produced good or service, foreign or domestic, is the third major compo- nent of spending
Transfers
a category that includes government payments for Social Security and Medicare benefits,7 unemployment insurance, welfare payments, and so on, are payments (primarily to individuals) by the government that are not made in exchange for current goods or services
Net exports
are exports minus imports
National income
is the sum of eight types of income
Statistical discrepancy
arises because data on income are compiled from different sources than data on production; the production measure minus the income measure equals the statistical discrepancy
net national product (NNP)
National income plus the statistical discrepancy
Depreciation
(also known as consumption of fixed capital) is 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
equals taxes paid by the private sector, T, minus payments from the government to the private sector (transfers, TR, and interest payments on the government debt, INT):
net government income = T - TR - INT.
Wealth
The value of assets minus the value of liabilities is called
national wealth
The wealth of an entire nation is called
saving
of any economic unit is the unit’s current income minus its spending on current needs. The saving rate of an economic unit is its saving divided by its income
private saving
equals private disposable income minus consumption. Using the definition of private disposable income from Eq. we have
Spvt = private disposable income - consumption (2.6) = (Y + NFP - T + TR + INT) - C,
Government saving
is defined as net government income,less government purchases of goods and services. Using Sgovt for government saving, we write this definition of government saving as
Sgovt = net government income - government purchases (2.7) = (T - TR - INT) - G.
National saving
or the saving of the economy as a whole, equals private saving plus government saving. Using the definitions of private and government saving, Eqs. (2.6) and (2.7), we obtain national saving, S:
S = Spvt + Sgovt (2.8) = (Y + NFP - T + TR + INT - C) + (T - TR - INT - G)
= Y + NFP - C - G.
Equation (2.8) shows that national saving equals the total income of the economy, Y + NFP (which equals GNP), minus spending to satisfy current needs (con- sumption, C, and government purchases, G).
current account balance
equals payments received from abroad in exchange for currently produced goods and services (including factor services), minus the analogous payments made to foreigners by the domes- tic economy
uses-of-saving identity
It states that an economy’s private saving is used in three ways.
1. Investment (I). Firms borrow from private savers to finance the construc- tion and purchase of new capital (including residential capital) and inventory investment.
2. The government budget deficit (-Sgovt). When the government runs a budget deficit (so that Sgovt is negative and -Sgovt is positive), it must borrow from private savers to cover the difference between outlays and receipts.
3. The current account balance (CA). When the U.S. current account balance is positive, foreigners’ receipts of payments from the United States are not sufficient to cover the payments they make to the United States
flow variables
Variables that are measured per unit of time are
stock variables
In contrast, some economic variables are defined at a point in time
net foreign assets
of a country equal the country’s foreign assets (foreign stocks, bonds, and factories owned by domestic residents) minus its foreign liabilities (domestic physical and financial assets owned by foreigners)
Nominal variables
are measured in terms of current market values
real variable
In general, an economic variable that is measured by the prices of a base year
real GDP
also called constant-dollar GDP, mea- sures the physical volume of an economy’s final production using the prices of a base year
Nominal GDP
also called current-dollar GDP, is the dollar value of an economy’s final output measured at current market prices
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
GDP deflator
is a price index that measures the overall level of prices of goods and services included in GDP, and is defined by the formula
real GDP = nominal GDP/(GDP deflator/100).
consumer price index
or CPI, measures the prices of consumer goods
interest rate
is a rate of return promised by a borrower to a lender
real interest rate
(or real rate of return) on an asset 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) is the rate at which the nominal value of an asset increases over time. The symbol for the nominal interest rate is i.
The real interest rate is related to the nominal interest rate and the inflation rate as follows:
real interest rate = nominal interest rate - inflation rate = i - p.
expected real interest rate
is the nominal interest rate minus the expected rate of inflation, or r = i - pe, where r is the expected real interest rate and pe is the expected rate of inflation.
