Chapter 4: GPD: Measuring Total Production and Income Flashcards
Business Cycle
The alternating periods of expansion and recession
Expansion
Period during which total production and total employment are increasing
Recession
Period during which total production and total employment are decreasing
Economic Growth
The ability of an economy to produce increasing quantities of goods and services
Gross Domestic Product
The market value of all final goods and services produced in a geographic area during a period of time
Final Good or service
A good or service purchased by a final user
Intermediate goods
A good or service that is an input into another good or service
Income approach
GDP can be measured by adding up all the income in the economy
Expenditure Approach
Measuring GDP by adding up all the different types of expenditure in the economy
What are the four broad categories when measuring GDP through the expenditure method
Final consumption, gross fixed capital formation, investment in inventories and net exports
Final Consumption
All domestic purchases of goods and services used to satisfy individual or community needs and wants
- Largest single component of expenditure approach
- Can be divided into expenditures of households, not-for-profit organizations that serve households, and government
Gross fixed capital formation
The purchases of fixed assets by firms, governments, and households
Fixed assets
Tangible goods that will provide benefits over a long period of time and cannot be easily converted into cash
Investment in inventories
Finished products kept on hand to sell or inputs to turn into finished products
Net Exports
Value of a country’s total exports minus its imports
Exports
Goods and services produced domestically but sold to foreign firms, governments, and households
Imports
Goods and services produced in foreign countries and purchased by Canadian firms, governments, and households
Statistical discrepancy between expenditure and income approach
- Differences due to small errors in the original data and different estimation techniques
- Controlled for by taking the average of both methods
What information does calculating GDP with the income approach provide
How much each factor of production is recieving
What information does calculating GDP with the expenditure approach provide
what the output produced in a country is being used for
The expenditure approach in macroeconomic models
Older model
Y=C+I+G+Nx
- Y is GDP
- Consumption is final consumption done by households
- Investment is the money spent by firms on fixed capital formation and inventories
- Government spending is the final consumption spending and fixed capital formation done by government
- Net exports
What are the shortcomings of GDP as a measure of total production
Does not include household production and informal economy
Household production
Goods and services people produce for themselves
Informal Economy
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods or services are illegal
Shortcomings of GDP as a measure of well-being
Does not include value of leisure, State of environment, Crime and other social problems, division of goods and services
Nominal GDP
The value of final goods and service evaluated at current-year prices
- Increase represents an increase in quantity or price
Real GDP
The value of final goods and services evaluated at base-year prices
- Increase represents an increase in quantity
Price Level
Measures the average prices of goods and services in the economy
GDP Deflator
A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
Gross National Income
The value of incomes received by Canadians for the use of their factors of production no matter where in the world those factors of production are used
Net National Income
GNI minus consumption of fixed capital
Depreciation
The value of worn-out machinery, equipment and buildings
- also referred to as the consumption of fixed capital
Household income
The income received by households
- calculated by subtracting the earnings that corporations retain rather than pay to shareholders in the form of dividends and add payments received by households from the government in the form of transfer payments or interest payments
Household disposable income
Household income minus personal tax payments
Divisions of income
Overall referred to as gross domestic income
- Labor income: payments that households receive for supply labor to firms
- Corporate operating surplus: the profits that get paid to households that own shares in these operations
- small business income (mixed income): wages and profits earned by owners of unincorporated businesses
- taxes on production and imports
