Chapter 23 : Measuring a Nation’s Income Flashcards
Total income
Wages, rent, and profit
Total expenditure
Consumption, investment, government purchases, and net exports
Gross domestic product (GDP)
Market value of all final goods and services produced
within a country in a given period of time
GDP = Y = C + I + G + NX
Intermediate production
Goods that are produced by one firm to be further processed by another firm
Final production
Finished products sold to the end user
Gross national product (GNP)
Market value of all final goods and services produced by a nation’s residents in a given period of time
GNP = GDP + factor payment from abroad – factor payment to abroad
= GDP + net factor payment from abroad (NFA)
Depreciation(De)
Value of worn-out equipment and structures
(a) Consumption(C)
(b) Why does C exclude new housing ?
(a) Spending by households on goods and services, excluding new housing
(b) Because new housing can increase its value after time (different from others affected by depreciation)
(a) Investment(I)
(b) What does i exclude ?
(a) Spending on capital equipment, inventories, and structures, including household purchases of new housing
(b) spending on stocks, bonds, and mutual funds.
(a) Government purchases(G)
(b) Why does G exclude “transfer payment” ?
(EX: government payments for Social Security, welfare, and unemployment benefits)
(a) Spending on goods and services by all levels of government.
(b) Because government does not receive G and S in return.
(a) Net exports(NX)
(b) Why must Imports be subtracted ?
NX = Exports - Imports
Because C, I, G include expenditures on all goods (foreign and domestic) => foreign component must be removed so that only spending on domestic production remains.
Transfer payment
Expenditures by government for which they receive no goods or services
Real GDP (GDPr)
Output valued at base-year prices
Nominal GDP (GDPn)
Output valued at current prices
Base year
The year from which prices are used to measure real GDP
(a) GDP deflator
(b) Percentage change in GDP deflator is ____
(a) price index that measures price level in current year relative to base year
GDP deflator = (GDPn/GDPr) × 100
(b) a measure of inflation rate
Recession
Period of decline in GDP
Why must income be equal expenditure ?
Because in every transaction:
seller’s income = buyer’s expenditure
GDP is a measure of (a)____ in the economy.
GDP can be measured by adding up (b)____ or (c)____ in the economy.
=> income = expenditure = GDP.
(a) total income or total output
(b) earned income (wages, rent, and profit)
(c) expenditure on produced G and S
“Market value” means that ____
=> Items sold at higher prices are more heavily weighted in GDP.
production is valued at the price paid for the output.
“Of all” means that ____
EX: GDP exclude illegal drugs and household self-production include estimated rental value.
GDP attempts to measure all production legally sold in markets.
“Final” means that ____
EX: GDP include goods sold at retail, exclude intermediate goods.
GDP includes only G and S sold to end user
“Goods and services” means that ____
GDP includes both TANGIBLE and INTANGIBLE items (EX: cars and trucks ; lawyers’ and doctors’ services).
“Produced” means that ____
we excludes the sale of used items that were produced (and counted) in a previous period.
“Within a country” means that ____
GDP measures the value of production within the
geographic borders of a country.
“In a given period of time” means that ____
we measure GDP per year or per quarter.
Why the difference between measuring GDP by expenditure and measuring GDP by income is statistical discrepancy ?
Because GDP data are statistically “seasonally adjusted” to eliminate the systematic variations in seasonal events like Christmas and crop harvest
=> different in expenditure statistic
Net national product (NNP)
NNP = GNP - Depreciation(De).
National income (NI)
the total income earned by nation’s residents.
NI = Y = NNP - Indirect taxes(Ti) + Subsidies.
Personal income (PI)
the income that households and noncorporate businesses receive.
PI = NI - Profit(Pr) - social insurance + dividends +
government transfer to individual + interest income
from holding government debt
Disposable personal income (Yd)
income received after paying taxes
Yd = PI - net personal taxes(T)
= Consumption(C) + Saving(S)
(a) ____ is better measure of production in the economy.
(b) Is GDP a Perfect measure of economic Well-Being?
(a) GDPr
(b) NO, because:
- GDP excludes leisure, quality of environment,
G and S produced at home and not sold in markets.
- GDP says nothing about “Distribution” of income
- GDP fails to capture underground/shadow economy
