Chapter 5 - Summary and Key Concepts Flashcards
What is Value Added in National Output?
Each firm’s contribution to total output, called value added, is the value of the firm’s output minus the values of all intermediate goods and services that it uses. The sum of all values added across all firms in an economy equals the gross domestic product (GDP).
Example sentence: The value added by a car manufacturer is the selling price of the cars minus the cost of parts and materials.
What are Intermediate and Final Goods?
Intermediate goods are used as inputs in the production of other goods, while final goods are consumed directly by the end user and not used in the production of other goods.
Additional information: Examples of intermediate goods include steel used in car manufacturing, while examples of final goods include cars sold to consumers.
How is GDP Calculated as the Sum of All Values Added?
GDP can be calculated by summing the value added at each stage of production for all goods and services in an economy, reflecting the total economic output.
Additional information: This calculation method ensures that the total GDP reflects the value added at each stage of production.
How is National Income Computed?
National income can be computed in two ways: by summing total expenditure on domestic output or by summing the total income generated by domestic production. Both methods should yield the same total by standard accounting conventions.
Example sentence: National income can be computed by adding up wages, profits, and rental income generated within the country.
What is Included in the Expenditure Side of National Accounts?
The expenditure side includes:
- C: Consumption expenditures of businesses and households
- I: Investment in inventory accumulation, plant and equipment, and new residential construction
- G: Government purchases of goods and services
- NX: Net exports of goods and services
Example sentence: The expenditure side of national accounts tracks the spending patterns of different sectors in the economy.
What is GDP from the Income Side?
GDP from the income side is calculated by summing all incomes earned by factors of production in an economy, including wages, profits, and rents.
Additional information: This method of calculating GDP focuses on the incomes generated by the production process.
What are Nominal and Real Measures of National Income?
Real measures of national income reflect changes in the quantities of goods and services produced, adjusted for inflation. Nominal measures reflect changes in both the prices and quantities of goods and services produced.
Additional information: Real measures provide a more accurate representation of changes in economic output over time.
What is the GDP Price Deflator?
The GDP price deflator is an index that measures the average price of all goods and services produced in an economy. It is derived by comparing nominal and real GDP.
Additional information: The GDP price deflator helps in understanding the overall price level changes in an economy.
What are the Limitations of GDP?
GDP does not include production from illegal activities, the underground economy, or non-market activities. It also misses aspects of economic activity that do not pass through formal markets.
Additional information: Limitations of GDP measurement can lead to an incomplete picture of the overall economic activity.
Why is GDP Still Important Despite Its Limitations?
GDP remains an important measure because it captures the total economic activity that passes through the nation’s markets, and recorded changes in GDP generally do an accurate job of reflecting changes in economic activity.
Additional information: Despite its limitations, GDP is a widely used indicator of economic performance and activity.
How is Per Capita GDP and Productivity Related?
Per capita GDP is a measure of the average economic output per person and is often used as an indicator of average living standards and economic productivity.
Additional information: Per capita GDP provides insights into the economic well-being of individuals in a country.
How Do Living Standards Relate to GDP?
While GDP is a measure of economic activity, it does not fully capture living standards, which also depend on factors such as income distribution, environmental quality, and access to healthcare and education.
Additional information: Living standards are influenced by various factors beyond economic output.
What is Real GDP?
Real GDP measures the total value of all goods and services produced, adjusted for inflation, reflecting the true increase in production.
Additional information: Real GDP provides a more accurate representation of the actual growth in an economy.
What is Nominal GDP?
Nominal GDP measures the total value of all goods and services produced at current prices, not adjusted for inflation.
Additional information: Nominal GDP reflects the current market value of goods and services produced.
What are Omissions from GDP?
GDP does not account for non-market transactions, illegal economic activities, environmental degradation, and non-monetary aspects of quality of life.
Additional information: Omissions from GDP measurement can affect the accuracy of economic assessments.
