Chapter 23 Part 1 Flashcards
What does economy mean?
The collection of productive activities engaged in by everyone in a nation
What does GDP measure?
Measures total income of everyone in the economy
What are the three basic ways to measure GDP
Output method: adding up all the goods and services produced in economy
Income method: adding up what is earned by people and firms in the economy ~> wages, rents , profits
Spending method: adding up all the components of the economy (people, firms, govt) spend on goods and services
Spending method what is critical
For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller
The circular flow diagram
Households: own the factors of production (labor + capital)
-sell/rent these factors to firms for $$$
-use the income to buy and consume goods and services
Firms: buy/ lease factors of production from households
-use these factors to produce goods and services
-sell goods & services to households for income
What big things does the circular flow diagram omit? gov, financial system, the foreign sectors
The gov-> collects taxes, buys goods + services itself (not just firms and households)
The financial system-> matches savers supply of funds with borrowers demand for loans
The foreign sectors-> trades goods+ services, financial assists and currencies with the country’s residents
what is the definition of GDP
1) the market value-all final goods and services produced within a country in a given period of time
2) all final goods and services produced-
3) within a country
4) in a given period of time
What are the four components of GDP?
GDP= total spending
-Consumption-> spending by ppl
-Investment
-gov purchases
-the difference between exports- imports
Y= C+ I + G + Net exports
What is investment? What is it not?
Total spending by firms on goods that will be used in the future to produce more goods
(Spending by firms)
Includes:
-capital equipment (machines, tools)
-structures (factories, office buildings, houses)
-inventories (goods produced not sold yet)
It doesn’t mean the purchase of financial assets
What are Government purchases?
All spending on the goods+ services purchased by all gov -> federal, state, and local
What does G exclude?
Transfer payments such as social security or unemployment insurance benefits!! (That’s consumer spending)
What is the formula for Exports and imports?
Exports- Imports = Net exports
What does mercantilism mean?
The believe that a country is more prosperous when they export more than they import
Does inflation distort GDP?
Yes, inflation is just increase in price we are not richer from the 1980s
What is nominal GDP?
Values output using current prices-> that is, prices I. The period being measured
(Not corrected for inflation)
