Chapter 6 Flashcards
Final good
a good that is ready for its ultimate designated use.
- GDP uses ONLY final goods and services to avoid double/multiple counting.
Gross Domestic Product (GDP)
the value of all final goods and services produced in a country during a time period (not accounting for inflation)
Intermediate good
a good that is used in the production of another good.
Double counting
adding the value of g&s twice mistakenly by counting intermediate goods into GDP
Nondurable goods
tangible consumer items that are consumed/only used once (food)
Semi-durable goods
items that can be used more than once and lasts ~1 year (cloth)
Services
intangible items of value provided to consumers as opposed to physical goods (haircuts)
Fixed investment
all new spending by producers on capital/producer goods that increases production capabilities (machinery, tools, factory)
Inventory investment
purchases by businesses that add to the stocks of goods kept by the firm to meet consumer demand, an increase in inventory
Investment (I)
The creation of capital goods to facilitate future production
Government Purchases (G)
Government expenditures on goods and services.
- Includes employee salaries & payments to suppliers.
- Does not include transfer payments such as EI and Canada Pension Plan
Income approach to calculating GDP
Calculates GDP by summing up the incomes received by owners of resources used in the production of goods and services.
- Add indirect taxes and subtract subsidies.
- Add depreciation (or capital consumption allowances).
Factor payments
wages/salaries, rent, interest payments, and profits paid to the owners of productive resources.
Personal income
the amount of income received by households (including transfer payments) before income taxes.
Disposable income
Personal income available AFTER taxes.
Price index
a measure of the trend in prices of goods and services over time.
GDP deflator
a price index that measures the average level of all final goods and services produced in the economy.
- It is difficult to compare nominal GDP over time because of the changing value of money over time.
Important factors excluded from GDP calculation
Non-market transactions, Underground economy, Leisure, Externalities, Quality of goods
- In less-developed countries GDP is more serious, because a significant amount of food and clothing is produced at home.
Non-market transactions
the provision of goods and services outside of traditional markets for which no money is exchanged. (gifting & cooking for household)
Underground economy
Unreported income from both legal & illegal sources.
- Illegal activities are hidden, therefore unreported.
- Legal activities that are unreported to avoid taxes.
Externalities
side effects that accompany production and consumption but which are not included in the price.
- Production of some g&s has costs and benefits not included in price.
- The true value to society is not being reflected.
