Chapter 5.2 Flashcards
What is National Income Accounting?
A system used to measure the total economic activity of a country, involving the calculation of GDP through various approaches and integrating different economic sectors like households, government, and foreign trade.
Example sentence: National Income Accounting helps policymakers understand the overall health of an economy.
What is the Circular Flow of Income?
A model showing the continuous flow of money between different sectors of the economy—households, businesses, government, and the foreign sector—illustrating how national income equals national expenditure and national output.
Additional information: The Circular Flow of Income is a fundamental concept in macroeconomics.
What Are the Key Components of the Circular Flow Diagram?
Includes domestic households, the financial system, the government, domestic producers, and the rest of the world. It highlights transactions like consumption, investment, taxes, and trade flows.
Additional information: The Circular Flow Diagram simplifies the complex interactions within an economy.
How is GDP Measured from the Expenditure Side?
By adding up all expenditures needed to purchase domestically produced output, divided into four categories: consumption, investment, government purchases, and net exports.
Example sentence: GDP measured from the expenditure side helps determine the total demand for goods and services in an economy.
How is GDP Measured from the Income Side?
By summing all income generated by domestic production, including wages, interest, profits, and adjusting for indirect taxes and depreciation.
Additional information: GDP measured from the income side provides insights into the income distribution within an economy.
What are the Categories of Expenditure in GDP Calculation?
Consumption Expenditure: Spending by households on goods and services.
Investment Expenditure: Spending on goods not for present consumption, including inventories and capital goods.
Government Purchases: Spending by the government on goods and services.
Net Exports: Exports minus imports.
Additional information: The categories of expenditure in GDP calculation help analyze the different drivers of economic growth.
What Constitutes Investment in National Income Accounting?
Includes changes in inventories, purchases of new plant and equipment, and new residential housing construction.
Example sentence: Investment in National Income Accounting reflects the level of capital formation in an economy.
What is the Difference Between Government Purchases and Government Expenditures?
Government purchases involve spending on currently produced goods and services included in GDP, while government expenditures may include transfer payments like pensions, which are not included in GDP calculations.
Additional information: Distinguishing between government purchases and expenditures is crucial for accurate GDP measurement.
What are Net Exports?
The difference between the value of a country’s exports and its imports. It reflects the net spending by the rest of the world on the country’s goods and services.
Additional information: Net exports play a significant role in determining a country’s trade balance.
What are the Common Errors in National Income Accounting?
Includes statistical discrepancies due to measurement errors in calculating GDP from both the income and expenditure sides, which are then reconciled to provide a consistent measure of GDP.
Additional information: Recognizing common errors in National Income Accounting helps improve the accuracy of economic data analysis.
How Does the Circular Flow Model Explain the Interactions Among Different Economic Sectors?
Demonstrates how money flows between sectors via consumption, savings, taxes, and trade, with each flow balancing the others to maintain a stable economic system.
Additional information: Understanding the Circular Flow Model is essential for comprehending the interdependence of economic activities.
Why is Consistency Important in National Income Accounting?
Ensures that GDP comparisons over time accurately reflect changes in economic activity, despite the use of arbitrary rules and decisions in the accounting process.
Additional information: Consistency in National Income Accounting enhances the reliability of economic indicators for policy-making purposes.
