Chapter 4 Flashcards
5 Components of GDP
ALL
At Market Value (market prices)
Final goods and services
In a given country
In a given time period
4 players in the economy
Households
Firms
Government
Rest of the World
Household contributions to economy
Consumption expenditure (C)
Savings Expenditure (S)
Firms contributions to economy
Investment (I)
Government Expenditure contributions to economy
Government Spending (G)
Transfer Payments (TR)
Total Tax Revenue (T)
Rest of World Contributions to economy
Exports (X)
Imports (M)
Net Exports (NX)
Depreciation
decrease in value of firm’s capital
Gross Investment
total amount spend buying new capital and replacing depreciated capital
Net investment
amount that value of capital increases
Expenditure approach of measuring GDP
GDP = (C + I + G + X - M)
Income approach of measuring GDP
measures GDP by factors of production they hire (rent, wages, interest, and profit)
Net Domestic Income at Factor costs
NDIfc= w + other factors
w= wages, salaries, supplemental income
other factors are profits, interest, etc.
Gross domestic income at factor costs
NDIfc + depreciation
GDP = (regarding income approach)
GDP = (NDIfc + Depreciation + Indirect Taxes less subsidies)
Nominal GDP
value of final goods/services when valued at prices of that year
Real GDP
value of final goods/services when valued at prices of a base year
2 main uses of GDP
comparing standard of living over time
comparing standard of living across countries
Potential GDP (Yp)
max quantity of Real GDP produced while avoiding shortages that would make inflation. Full employment at Yp. Doesn’t grow at a constant rate
Lucas Wedge
$ value of gap between Real GDP/person and what Real GDP/person would have been if the 1960’s growth rate persisted
Two Phases of the Business cycle
expansion- GDP increase
recession- GDP decrease for at least 2 quarters
Two Turning Points of the Business cycle
Peak- end of expansion
Trough- end of recession
2 problems with comparing living standards across countries
different currencies
different prices
5 limitations of GDP, over or underestimate, and examples
Household production (cooking)- U
Underground economic activity (drugs)- U
Leisure time -U
Volunteers (coaches) -U
Environmental quality (pollution) -O
