Chapter 20-21 Flashcards
What is the performance policy and what are its interrelated features?
Real GDP
Unemployment
Inflation
Modern Economic Growth
When output surpasses population
Started in the industrial revolution when automation and factory production grew
increased the output per person when prior, there was little to no growth in the living standards.
Nations experienced sustained increases in real GDP per capita
Savings
Disposable income not spent for consumer goods; Occurs when current consumption is less than current output
Investments
when resources are devoted to increasing future output
Choosing between current and future consumption
People must reduce current consumption in order to increase savings to make investments for future consumption
Expectations
anticipations of consumers, firms, and others about future economic conditions
When they are not met, shocks happen
Shocks
unexpected changes in supply (aggregate supply) or demand (aggregate demand); leads to business decisions
Demand Shocks
unexpected changes in demand
Most short-run fluctuations are a result of demand shocks, economies become forced to respond through changes of employment and output NOT prices
Sticky Prices
inflexible and slow to change (sticky) price changes cannot quickly equalize the quantities demanded of such goods and services’ respective quantities supplied
How would the economy’s performance be assessed?
National Income Accounting
National Income Accounting
system used by governments and economists to measure the overall economic activity/performance of a country. It provides a framework for understanding the total income generated by a nation’s economy and how that income is distributed across households, businesses, and the government.
Gross Domestic Product (GDP)
The total market value of all final goods and final services produced annually within the boundaries of a nation. Does not include the value of intermediate goods and services.
Intermediate goods
Goods purchased for the purpose of resale (ex: wholesale)
Final Goods
goods purchased by their end users
How can we avoid multiple counting?
Measuring only the value added
Value added
The value of a product sold by a firm minus the value of the products (materials) purchased and used by the firm to produce that product.
Nonproduction Transactions
purely financial transactions that do not contribute to current production or output; Excluded from GDP because they have nothing to do with final goods
Types: Financial transactions and secondhand sales
Financial Transactions
public transfer payments (government - ex: welfare, fin aid, ss)
private transfer payments (ex: allowance)
Stock market transactions
Expenditures Approach
method that adds all expenditures made for producing final goods and final services to measure the gross domestic product.
GDP = C + I + G + Xn
Income Approach
method that adds all the income generated by the production of final goods and final services to measure GDP
Adds compensation of employees, rents, interest, proprietors’ income, corporate profits, and taxes on production and imports
Subtracts net foreign factor income and adds consumption of fixed capital (depreciation) and a statistical discrepancy
