Chapter 5 National Income Accounting

Question 1

Gross Domestic Product

GDP

Answer 1

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.

Question 2

GDP v.s. GNP

Gross domestic product, gross national product

Answer 2

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

Question 3

GDP per capita

Answer 3

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.

Question 4

Intermediate goods

Answer 4

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.

Question 5

Final goods

Answer 5

The goods produced at the end of the production sequence, for the use by consumers (or other market participants)

Question 6

Value added

Answer 6

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

Question 7

Nominal GDP

Answer 7

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

Question 8

Real GDP

Answer 8

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

Question 9

Base year

Answer 9

The year used for comparative analysis; the basis for indexing price changes.

Question 10

Inflation

Answer 10

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

Question 11

Production possibilities

Answer 11

The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.

Question 12

Depreciation

Answer 12

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

Question 13

Net domestic product

NDP

Answer 13

• 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

Question 14

Investment

Answer 14

Expenditures on (production of) new plants, equipment and structures (capital) in a given time period, plus changes in business inventories

Question 15

Gross investment

Answer 15

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

Question 16

Net investment

Answer 16

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

Question 17

Exports

Answer 17

Goods and services sold to international buyers

Question 18

Imports

Answer 18

Goods and services purchased from international sources

Question 19

Net exports

Answer 19

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

Question 20

National income

NI

Answer 20

Total income earned by current factors of production: GDP less depreciation, plus net foreign factor income

Question 21

Personal income

PI

Answer 21

Income received by households before payment of personal taxes

Question 22

Disposable income

DI

Answer 22

After-tax income of households; personal income less personal taxes

Question 23

Saving

Answer 23

That part of disposable income not spent on current consumption; disposable income less consumption.

Question 24

National income accounting

Answer 24

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.