Chapter 7 Flashcards
National Income Accounting
Used to measure a country’s total output (value of national economy)
Microeconomics
The study of how individuals and firms manage resources
Macroeconomics
The study of the economy on a broad scale, focusing on issues such as economic growth, unemployment, and inflation
Definition of GDP
Gross Domestic Product:
- Market Value
- Of final goods and services
- Produced within a country
- In a given period of time
Market Value
Common unit of goods and services; tells us that GDP is going to be a number measured in the local currency
Final Goods and Services
Count only expenditures on final goods and services to find out how much a purchase contributed to GDP
Produced Within a Country
Goods and services that count toward GDP are defined in terms of Location of production
GNP
Gross National Product:
The sum of the market values of all final goods and services produced and capital owned by the permanent residents of a country in a given period of time, no matter location.
Given Period of Time
GDP is calculated on a quarterly basis
Expenditure Approach
Adding up all the money people spend buying final goods and services - omitting spending on intermediate goods. The sum will be the market value of all output sold in the economy
Circular flow diagram
Shows that
National Production = National Expenditure = National income
Three approaches to measuring GDP
- Expenditure Approach
- Income Approach
- Value-Added Aproach
Expenditure Approach and how to find total expenditure
Highlights the importance of consumer spending versus government purchases
Add: consumption, investment, government purchases, and net exports to find total expenditure
Income Approach
Emphasizes information about the relative importance of different factors of production
Value-added approach
Useful for tracking how goods are sold and resold
Consumption
Measures spending on goods and services by private individuals and households
Investment
Spending on productive inputs such as factories, machinery and inventories
Includes newly built houses but not old ones or renting
Government Purchases
Goods and services bought by all levels of government (including consumption type purchases)
Money transfers do not count!
Net Exports
Represents the value of goods and services produced domestically and consumed abroad minus the value of goods and services produces abroad and domestically
Expenditure Equation
Expenditure = C+I+G+NX= Production
The Income Approach
Income= wages+ Interest + rental income + profits
-gives the same result as the expenditure method in an economy without any imports and exports
The Value-Added Approach
Avoids problems of double counting and is especially useful in clarifying the resale of existing goods
-looks at all transactions and the value they add to the economy
What does an increase in GDP result in
An increase in output and an increase in prices
Difference between real and nominal GDP
Real: focuses solely on output, controlling for price changes. Calculated based on goods and services valued at constant prices for a specific year.
Nominal: reporting GDP without controlling for price changes. Calculated based on goods and services valued at current prices.
GDP Deflator
A measure of the overall change in prices in an economy using the ratio between real and nominal GDP
What does macroeconomics compromise
Economic Growth
Inflation
Unemployment
