Chapter 4 Flashcards
Gross Domestic Product (definition)
Market value of the final goods and services produced within a country in a given time period
For an economy as a whole, income must equal:
Expenditure
Households sell and firms buy the services of these things in factor markets
Labour, Land, Capital
What do labor, capital, and land specifically earn for households?
Labour earns wages, Capital earns interest, Land earns rent
What is the formula for GDP with the expenditure approach?
Consumption + Investment + Government Expenditure + Exports - Imports
What is Consumption (C)?
Spending by households in goods and
services, with the exception of purchases of new housing
What is Investment (I)?
Spending in capital-equipment, inventories, and structures, including household spending on new housing
What is Government Expenditure (G)?
spending in goods and services by local, territorial, provincial, and federal governments
What are financial transfers? Are they included in the circular flow of expenditure?
Government transfers, such as subsidies to firms. They are not included in expenditure.
What are Exports (X)?
Goods and services sold from Canada to the rest of the world
What are Imports (M)?
Goods and services bought by Canada from the rest of the world
What are Net Exports? What is this Value also called?
value of a nation’s exports minus the value of its imports; also called the trade balance
What determines whether the same good is an intermediate or final good?
What it is used for, not what it is. Example; Ice cream for consumption vs ice cream for sundaes
Are financial assets and second-hand goods final or intermediate goods?
Trick question ;), they are neither <3.
What is the relationship between Gross Investment, Net Investment, and Depreciation?
Net Investment = Gross Investment- Depreciation
Who makes consumption expenditure?
Households
Who makes investments?
Firms
What do governments buy?
Goods and Services
What does the rest of the world buy?
Exports
What do firms pay to households?
Income (Y)
Where do firm’s retained earnings go in the Circular Flow?
Household’s sector income
What are the 2 ways GDP can be measured?
Expenditure and Income
Where are purchases by new homes counted in the expenditure method?
Investments
What do The National Income and Expenditure Accounts divide income into?
- Wages, Salaries, and Supplementary Labour Services
- Other Factor Incomes
What are Wages, Salaries, and Supplementary Labour Services, and what does it include?
The payment for labor services, wages plus benefits such as pension contributions
What are other factor incomes?
Corporate profits, interest, farmer’s income, and income from non-farm unincorporated businesses
What must you do to get net incomes to gross incomes?
Add depreciation
Wages, Salaries, and Supplementary Labour Services + Other Factor Incomes + Depreciation =
Gross Domestic Income at Factor Cost
What must you do to get from Gross Domestic Income at Factor Cost to GDP?
Add indirect taxes - subsidies
What is an indirect tax?
A tax paid by consumers when they buy goods and services
What is a subsidy?
A payment by the government to a producer
What is the gap between the Expenditure approach and the Income approach called? How is it calculated?
Statistical discrepancy, GDP Expenditure Total - GDP Income Total
What is Real GDP?
The value of goods and services produced in a given year when valued at the prices of a reference base year
What is Nominal GDP?
A more precise name for GDP
How do we find the total expenditure for Real GDP?
Quantity Produced in our Year x Price of base year
Why do economists use estimates of Real GDP?
- To compare the standard of living over time
- To compare the standards of living across countries
How is Real GDP Per Person calculated? What does it measure?
Real GDP/Population, the value of goods and services the average person can enjoy
What is Potential GDP?
The maximum quantity of Real GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurial ability that would bring rise to inflation
What is the Lucas Wedge?
The dollar value of the accumulated gap between what Real GDP Per Person would have been if the growth rate of the 1960s had persisted and what Real GDP Per Person turned out to be.
What are the fluctuations in the pace of expansion of Real GDP called?
The business cycle
What is the business cycle?
A periodic, but irregular up-and-down movement of total production and other measures of economic activity
What are the phases of the business cycle?
Expansion and Recession
What are the turning points of the business cycle?
Peaks and Troughs
What is expansion?
A period in which real GDP increases
What is a Real GDP Nowcast?
An estimate of real GDP in the current quarter and reported in the current quarter.
What is PPP?
Purchasing Power Parity. It uses the same prices in both countries to compare GDP.
What are the limitations of Real GDP?
It cannot measure: Household production, Underground economic activity, Leisure time, and Environmental quality
What is HDI?
Human Development Index.
What does HDI measure?
It combines real GDP, life expectancy, health and education.
How is Chained Dollar Real GDP measured?
The ratio of two values of GDP in adjacent years, measured at a common set of prices
