Chapter 6/Chapter 7 Flashcards
National Income Accounting
A measure for national output and real GDP
GDP
the market value of all final G/S produce in a year at the market price within a nation’s borders
Three main factors national income accounting does
- Evaluates the economic condition of the economy
- Can compare national accounts over years
- Provides a measurement to compare nations
Final G/S
Are G/S being purchased for final use by the purchaser
Intermediate G/S
G/S that are used in the production of final G/S
Two major types of non-production transactions
1) Purely financial transactions
2) Second Sales
Purely financial transaction
1) Public Transfer payments
ex: social security payments
2) Private Transfer payments-a transfer from one person to another
ex: money from your mom
3) Security Transactions-Buying and selling of stocks and bonds are not included in GDP.
Why do new issued stocks and bonds indirectly effect GDP, while old stocks and bonds don’t
The sales of NEW stocks and bonds are indirectly in GDP, since money is taken from savers to businesses that spend the proceeds on capital goods. Those capital goods contribute to output. Whereas buying and selling old stocks and bonds is simply transferring ownership from one person to another.
Personal Consumption Expenditures
Expenditures by households on final G/S with the exception of new housing.
Gross Investment
Net investment + CCA (depreciation)
Net Investment
Gross - CCA (depreciation)
Depreciation (CCA)
Investment in replacement capital
Relationship between Net Investment and Economic Growth
Net investment is positive the PPC shifts out
Net investment is negative the PPC shifts in
Net investment is zero the PPC remains the same
Government purchases (G)
Includes all government spending on final G/S
Net Exports (Xn)
Exports - Imports
Nominal GDP
A measure of national output based on current prices of G/S. Doesn’t take into account inflation
Real GDP
Measures output in constant prices (Eliminates the influence of price changes contained in nominal GDP)
Implicit GDP Deflator
A measure of price changes across the economy that reflects all of the final G/S included in GDP/Measures inflation
Consumer Price Index
Designed to measure the impact of price changes on the cost of the typical bundle of G/S purchased by households
1.Index number
2. What does the number mean
3.Change to percentage
Producer Price Index
Measures the average price changes received by the producer
COLA
Cost of living adjustments means that an increase in wages to match the rising cost of G/S
Problems with GDP
1) Underground Economy: Many economic activities are not reported therefore not calculated.
2) Improved Product Quality: GDP doesn’t reflect product quality
3) Real GDP doesn’t include leisure time.
4) Must look at Real GDP person: The real GDP increases but, the population increases even more, causing the standard of living to decrease
Exchange Rate
is the rate at which one country’s currency can be traded for another country’s currency
Appreciation
when the value of one currency rises in value in relation to another currency
Depreciation
when the value of one currency falls in value in relation to another currency
Three things Financial Statements do
1) Summarize financial performance
2) Measure the achievement of goals
3) Provide feedback for financial planning
Balance Sheet
Three components
determines your financial position at a point in time
1) Assets-items that are owned and that have a market value
2) Liabilities-bills and other obligations owed to creditors
3) Net worth-Total Assets - Total Liabilities
Current Liabilities
Two types of them
Is any debt that must be paid within one year
1) Unpaid bills
2) Portions of installments that are due within one year
Assets
Three main categories
Assets are things you own that have market value
1) Liquid Assets: Cash or other asset that can be easily converted to cash
2) Life-style assets: Assets that depreciate quickly in value, and help you achieve a certain life-style
3) Investment assets: Purchased for the purpose of increasing your net worth over time
Net Present Value
Is the sum of the discounted cash flows for an investment project
