Chapter 2 - Abel

Question 1

national income accounts

Answer 1

are an accounting framework used in measuring current economic activity

Question 2

product approach

Answer 2

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

Question 3

value added

Answer 3

the value of its output minus the value of the inputs it purchases from other producers

Question 4

income approach

Answer 4

measures economic activity by adding all income received by producers of output, including wages received by workers and profits received by owners of firms

Question 5

expenditure approach

Answer 5

measures activity by adding the amount spent by all ultimate users of output

Question 6

fundamental identity of national income accounting

Answer 6

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)

Question 7

gross domestic product (GDP)

Answer 7

the market value of final goods and services newly produced within a nation during a fixed period of time

Question 8

underground economy

Answer 8

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

Question 9

Intermediate goods and services

Answer 9

are those used up in the produc- tion of other goods and services in the same period that they themselves were pro- duced.

Question 10

Final goods and services

Answer 10

are those goods and services that are not interme- diate. Final goods and services are the end products of a process

Question 11

capital good

Answer 11

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

Question 12

Inventories

Answer 12

are stocks of unsold finished goods, goods in process, and raw materials held by firms

Question 13

gross national product

Answer 13

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.

Question 14

net factor payments from abroad (NFP)

Answer 14

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.

Question 15

income–expenditure identity

Answer 15

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

Question 16

Consumption

Answer 16

is spending by domestic households on final goods and services, including those produced abroad

Question 17

Consumption expenditures

Answer 17

1. 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);
2. nondurable goods, which are shorter-lived items, such as food, clothing, and fuel; and
3. services, such as education, health care, financial services, and transportation.

Question 18

Investment

Answer 18

includes both spending for new capital goods, called fixed investment, and increases in firms’ inventory holdings, called inventory invest- ment.

Question 19

Fixed investment

Answer 19

1. 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
2. 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.

Question 20

Government purchases of goods and services

Answer 20

, 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

Question 21

Transfers

Answer 21

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

Question 22

Net exports

Answer 22

are exports minus imports

Question 23

National income

Answer 23

is the sum of eight types of income

Question 24

Statistical discrepancy

Answer 24

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

Question 25

net national product (NNP)

Answer 25

National income plus the statistical discrepancy

Question 26

Depreciation

Answer 26

(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

Question 27

private disposable income

Answer 27

measures the amount of income the private sector has available to spend

Question 28

Net government income

Answer 28

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.

Question 29

Wealth

Answer 29

The value of assets minus the value of liabilities is called

Question 30

national wealth

Answer 30

The wealth of an entire nation is called

Question 31

saving

Answer 31

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

Question 32

private saving

Answer 32

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,

Question 33

Government saving

Answer 33

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.

Question 34

National saving

Answer 34

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).

Question 35

current account balance

Answer 35

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

Question 36

uses-of-saving identity

Answer 36

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

Question 37

flow variables

Answer 37

Variables that are measured per unit of time are

Question 38

stock variables

Answer 38

In contrast, some economic variables are defined at a point in time

Question 39

net foreign assets

Answer 39

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)

Question 40

Nominal variables

Answer 40

are measured in terms of current market values

Question 41

real variable

Answer 41

In general, an economic variable that is measured by the prices of a base year

Question 42

real GDP

Answer 42

also called constant-dollar GDP, mea- sures the physical volume of an economy’s final production using the prices of a base year

Question 43

Nominal GDP

Answer 43

also called current-dollar GDP, is the dollar value of an economy’s final output measured at current market prices

Question 44

price index

Answer 44

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

Question 45

GDP deflator

Answer 45

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).

Question 46

consumer price index

Answer 46

or CPI, measures the prices of consumer goods

Question 47

interest rate

Answer 47

is a rate of return promised by a borrower to a lender

Question 48

real interest rate

Answer 48

(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

Question 49

nominal interest rate

Answer 49

(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.

Question 50

expected real interest rate

Answer 50

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.