Chapter 5 Flashcards
What are the two markets separating households from firms?
- Product market: contains goods and services supplied by firms and demanded by households.
- Factor market: contains the labor and stuff supplied by households and demanded by firms.
Define GDP.
• Total market value of final goods and services produced in the economy in a given year.
What’s the difference between final and intermediate goods?
- Final goods: bought for consumption, not those sold between firms.
- Intermediate goods: goods exchanged between firms for the sake of production such as machinery or raw materials.
Total market value.
- How GDP is calculated.
* the sum of quantity of n times price of n for product n for all final products of the economy.
Real GDP vs. nominal GDP.
- Real GDP: measure of GDP controlled for changes in prices.
* Nominal GDP: value of GDP in current $.
Define economic growth.
• Sustained increase in real GDP over a long period of time.
GDP deflator.
• Equal to (nominal GDP / real GDP) x 100. Finds the amount to adjust the GDP for [inflation].
Chain-weighted index.
• Determines changes in prices by using an average of base years from neighboring years.
Define the 4 components of GDP.
- Consumption: purchases by consumers.
- Private investment: purchases by firms.
- Gov’t purchases: purchases by fed, state, or local gov’t.
- Net exports: domestic exports - domestic imports.
What are the 3 components of consumption expenditures?
- Durable goods: lasts 6+ months.
- Nondurable goods: does not last more than 6+ months.
- Services: consumer purchases where nothing is produced.
What are the 3 components of private investment expenditures?
- New plants / equipment purchased during the year.
- Newly produced housing.
- Additions to the stock of inventories of firms in the year.
What is gross investment?
• Total new investment + expenditures.
Depreciation.
• Reduction in the value of capital goods as a result of wear.
Net investment.
• Gross investment - depreciation.
What are transfer payments?
- Payments by gov’t to individuals that do not include production of goods and services, such as welfare.
- This is not included in GDP.
What is a trade deficit? A trade surplus?
- Trade deficit: when net exports < 0.
* Trade surplus: when net exports > 0.
What is the GDP equation?
• Y = C + I + G + NX
What is national income?
• Total income earned by nation’s residents here and abroad in production of goods.
What is GNP?
• GDP + net income earned abroad.
What are the 6 components of national income?
- Compensation of employees.
- Corporate profits.
- Rental income.
- Proprietors income (basically small businesses).
- Net interests (stocks and banks).
- Other items.
What is personal income?
• Income, including transfer payments, received by households.
What is personal disposable income?
• Income left after income taxes.
Define value added.
• Sum of all incomes; included wages, interests, profits, and rents generated by organizations.
What is a recession? A depression?
- Recession: 6 months of more of losses.
* Depression: when 10% of GDP is lost; more serious that a recession.
What are the shortcomings of GDP?
- Housework and childcare are not taken into account.
- How much leisure ppl have is not taken into account.
- The underground economy is not taken into account; like eBay or lemonade stands.
- The effects of pollution are not taken into account.
How are the following calculated: per capita GDP, growth rate, and inflation?
- Per capita GDP = GDP / population.
- Growth rate = 100 x (GDP yr2 - GDP yr1) / GDP yr1.
- Inflation = nominal GDP growth rate - real GDP growth rate.
