Chapter 7: GDP and Real GDP Flashcards
Final Good
A good in the hands of its final user
Gross Domestic Product
The total market value of all goods and services produced within a country during a specific time period.
Intermediate Good
A good that is an input to the production of a final good.
Double Counting
Counting a good more than once when computing GDP.
Name 4 expenditure components
- Consumption
- Investment
- Government Purchases
- Net Exports
Consumption
The sum of spending on durable goods, nondurable goods and services.
Investment
The sum of all purchases or newly produced capital goods, changes in business inventories and purchases of new residential housing.
Inventory investment
Changes in the stock of unsold goods.
Fixed Investment
Business purchases of capital goods, such as machinery and factories and purchases of new residential housing.
Government Purchases
Federal, stare and local government purchases of goods and services and gross investment in highways, bridges and so on.
Government transfer payments
Payments to persons that are not made in return for currently supplied goods and services.
Imports
Total domestic spending on foreign goods.
Exports
Total foreign spending on domestic goods.
Net Exports
Exports minus imports
GDP =
C + I + G + (EX - IM)
Two ways in which firms’ inventory investment can rise:
- Planned inventory investment
- Unplanned inventory investment
Planned inventory investment
Firms may deliberately produce more units of a good and add them to inventory
Unplanned inventory investment
Consumers don’t buy as many units of output as produced, and unsold units are added to inventory.
National Income
Total income earned by citizens and businesses.
The sum of payments to resources.
National Income =
Compensation to employees + proprietors’ income + Corporate profits + Rental income of persons + Net interest
5 Components of national income
- Compensation of employees
- Proprietors’ income
- Corporate profits
- Rental income of persons
- Net interest
Compensation of employees
Total of
- wages and salaries paid,
- employers’ contributions to Social Security and employee benefit plans,
- monetary value of fringe benefits, tips and paid vacations.
Proprietors’ incom
Income earned by self-employed individuals and unincorporated business owners
(unInc. farms incl.).
Corporate profits
Income earned by stockholders of corporations. Includes: - Dividends - Retained income - Corporate profit tax
Net interest
Interest income received by households and governments minus interest payed.
(Using National income)
GDP =
National income - Income earned from the rest of the world \+ Income earned by the rest of the world \+ Indirect business taxes \+ Capital consumption allowance \+ Statistical discrepancy
Income earned from the rest of the world
Income that citizens living abroad earned by producing and selling goods.
Income earned by the rest of the world
Income that non-citizens (foreigners) earned by producing and selling goods within the country-borders.
3 Main indirect business taxes
- Excise taxes
- Sales taxes
- Property taxes
Why are indirect business taxes not part of national income?
They are not considered a payment to any resource.
They can be considered monies collected by government, not payments to land, labor, capital or entrepreneurship.
Why should indirect taxes be added when computing GDP from national income?
Indirect taxes are included in the purchases of goods and services and so are included when the expenditure approach is used to compute GDP.
Capital Consumption Allowance (Depreciation)
The estimated amount of capital goods used up in production through natural wear, obsolescence and accidental destruction.
The 5 measures for output produced in an economy
- Gross domestic product
- National income
- Net domestic product
- Personal income
- Disposable income
Net Domestic product
GDP minus depreciation (capital consumption allowance)
Personal Income
The amount that individuals actually receive.
Personal Income equals
National income - undistributed corporate profits - social insurance taxes - corporate profits taxes \+ transfer payments
Disposable income
The portion of personal income that can be used for consumption or saving.
Disposable income equals
Personal income - personal taxes.
Real GDP
The value of the entire output produced annually within a country’s borders, adjusted for price changes.
Real GDP =
∑ (Base-year prices x current-year quantities)
Economic growth
Increases in Real GDP
Business Cycle
Recurrent swings (up and down) in Real GDP
Five phases in the business cycle
- Peak
- Contraction
- Trough
- Recovery
- Expansion
Peak
Real GDP is at a temporary high.
Contraction
The contraction phase represents a decline in Real GDP.
Reccesion
Two consecutive quarter declines in Real GDP.
Trough
The low point in Real GDP, just before it begins to turn up.
Recovery
Real GDP is rising. It begins at the tough and ends at the initial peak.
Expansion
Increases in Real GDP beyond the recovery.
A business cycle measures from ____ to ____
peak to peak
Typical business cycle length
four to five years.
