chapter 2 Measuring Macroeconomic Data Flashcards
Gross domestic product (GDP) is
the total value of goods and services produced in an economy
the broadest measure of economic activity
National income accounting is
an accounting system that measures economic activity and its components
Fundamental identity of national income accounting:
Total Production = Total Expenditure = Total Income
Measuring GDP: The Production Approach
GDP is the current market value of all final goods and services newly produced in the economy during a fixed period of time
Not all goods and services are counted in GDP because they are:
Nonmarket goods and services, which do not have a market price (e.g., household services produced within a family), or
Produced in the underground economy
Many nonmarket goods and services are counted in GDP by their imputed values
Value added is
the value of a firm’s output minus the cost of the intermediate goods purchased by the firm
By adding up the value added from each firm, we get the final value of the goods and services produced
A capital good (e.g., a robot) is
used in the production of other goods that is not used up in the stages of production
New capital goods are classified as final goods because they are not included in spending on other final goods and yet their production is part of economic activity
Inventory investment
is the change in inventories (firms’ holdings of raw materials, unfinished goods and unsold finished goods) over a given period of time
Inventory investment is included in GDP for the same reason that we include capital goods
We calculate GDP over a fixed period of time, such as a quarter or a year
GDP is
a flow, which is an amount per a given unit of time
By contrast, a stock is a quantity at a given point in time
A stock is often an accumulation of flows over time
Examples:
Inventory investment is a flow, which accumulates into the stock of inventories
Saving is a flow, which accumulates into a person’s wealth
Consumption Expenditure
Total spending for currently produced consumer goods and services
Basic categories:
Consumer durables
Nondurable goods
Services
GDP is the total spending on currently produced final goods and services in the economy
National income identity:
Y = C + I + G + NX
where
Y= GDP = total production (output)
C= consumption expenditure
I = investment
G= govt. purchases of goods & services
NX = net exports = exports – imports
Investment
Spending on currently produced capital goods that are used to produce goods and services over an extended period of time
Basic categories:
Fixed investment
Inventory investment
Residential investment
For economists, investment spending refers to to the purchase of physical assets, such as new machines or new houses—purchases that add to GDP
Government consumption
includes government purchases for short-lived goods and services like health care and police
Government investment includes
includes spending for capital goods like buildings and computers represents
Pure government transfers (e.g., Social Security and Medicare) are excluded from G
Net exports (or trade balance) are exports minus imports
Why subtract imports from GDP?
Answer: Spending on imports is included in consumption expenditure, investment, and government purchases, but is not produced in this country
Measuring GDP: The Income Approach
Compensation of employees – wages and salaries of employees, and employee benefits
Corporate profits – profits after taxes of corporations
Other income – income of the self-employed, royalty income and net interest earned by individuals, etc.
Depreciation – the loss of value of capital from wear and tear
net domestic product = GDP – depreciation
Net factor income – wages, profits, and rent paid to U.S. residents by foreigners minus factor income paid by U.S. residents to foreigners
National income =
Compensation of employees + other income + corporate profits
