Chapter 5 National Income Accounting Flashcards
Gross Domestic Product
GDP
The total market value of all final goods and services produced within a nations borders in a given time period.
- the total dollar value of final output produced each year
- simply the sum of all final goods and services produced for the market in a given time period, with each good or service valued at its market price.
- if oranges were 20 cents each, and 2 billion oranges were sold in one year, then the value of orange production that year was $400 million ($0.20 X 2 billion)
- the use of prices to value market output allows us to summarize output activity and to compare the output of one period with that of another.
GDP v.s. GNP
Gross domestic product, gross national product
GNP: output produced by American owned factors of production, regardless of where they’re located.
- would include some output from a factory in china but exclude some output from factory in Kentucky
- in an increasingly global economy, where factors of production and ownership move easily across international borders, calculations of GNP have become very complex and a less dependable measure of the nations economic health.
GDP: refers to output produced within America’s borders
-is geographically focused, including all output produced within a nations borders regardless of whose factors of production are used to produce it
-apple’s output in china ends up in chinas GDP
Apple’s output produced in Kentucky ends up in America’s GDP
GDP per capita
The total GDP divided by total population; average GDP
- relates to the total value of annual output to the number of people who share that output
- refers to the average GDP per person
- GDP is the “pie” baked, per capita GDP divides it evenly among everyone
- doesn’t reflect how much each person actually gets because it isn’t evenly distributed
- measures of per capita GDP tell us nothing about the way GDP is actually distributed or used: they’re only a statistical average.
Intermediate goods
Goods or services purchased for use as input in the production of final goods or in services
-goods purchased for the use as input in further stages of production.
Final goods
The goods produced at the end of the production sequence, for the use by consumers (or other market participants)
Value added
The increase in the market value of a product that takes place at each stage of the production process.
-value added at each stage of production
Nominal GDP
The value of final output produced in a given period, measured in the prices of that period (current prices)
-the value of final output measured in current prices
Real GDP
The value of final output produced in a given period, adjusted for changing prices.
- the value of output measured in constant prices
- distinction between nominal and real GDP is important whenever the price level changes
Base year
The year used for comparative analysis; the basis for indexing price changes.
Inflation
An increase in the average level of prices of goods and services
- reflecting persistent increases in the price level
- can obscure actual declines in real output
Production possibilities
The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.
Depreciation
The consumption of capital in the production process; the wearing out of plant and equipment
-or made obsolete by advances in technology
-is estimated by the U.S. Department of Commerce
Determined in part by income tax regulations and may not accurately reflect the amount of capital consumed
Net domestic product
NDP
- the amount of output we could consume without reducing our stock of capital and thus next years production possibilities
- helps predict next years production possibilities
Helps calculate national income by taking the GDP and subtracting out depreciation which is the capital we wear out
GDP less depreciation
Investment
Expenditures on (production of) new plants, equipment and structures (capital) in a given time period, plus changes in business inventories
Gross investment
Total investment expenditure in a given time period
- is positive as long as some new plants and equipment are being produced
- stock of capital won’t grow unless investments exceed depreciation
Net investment
If our total investment exceeds our depreciation its positive
If not its negative
-Can be positive or negative
-negative=shrinking stock of capital
(Great depression- shrinking capital=declined ability to produce goods and services)
Gross investment less (minus) depreciation
Exports
Goods and services sold to international buyers
Imports
Goods and services purchased from international sources
Net exports
The value of exports minus the value of imports
Exports are added to GDP and imports are subtracted
The difference between the two are net exports
National income
NI
Total income earned by current factors of production: GDP less depreciation, plus net foreign factor income
Personal income
PI
Income received by households before payment of personal taxes
Disposable income
DI
After-tax income of households; personal income less personal taxes
Saving
That part of disposable income not spent on current consumption; disposable income less consumption.
National income accounting
The measurement of aggregate economic activity, particularly national income and its components
- the Great Depression of the 1930’s was a lesson in the need for better measures of economic performance, the need for timely information about the health of the national economy was evident, which is why the national income accounting was made
- tracks the economy’s performance, how good/bad the economy is to know what to improve
- provides a useful perspective of how the economy works: shows how factor markets relate to product markets, how output relates to income, and how consumer spending and business investment relate to production. Shows how flow of taxes and gov. Spending affects economic outcomes.
