Chapter 7: Measuring Domestic Output and National Income Flashcards
What is the purpose of national income accounting?
To measure the economy’s performance, monitor growth, and adjust policies as needed.
What is GDP (Gross Domestic Product)?
The dollar value of all final goods and services produced within a country’s borders in a specific time period.
Why does GDP count only final products?
To avoid double-counting by excluding intermediate goods.
What is the importance of using a monetary measure in GDP?
It allows aggregation of diverse goods/services using a common unit for comparison.
What is Gross Output (GO), and how does it differ from GDP?
GO measures sales across all production stages, while GDP counts only final product values.
What is “value added” in the context of GDP?
It is the market value of output minus the cost of purchased inputs at each production stage.
What is Gross Output (GO), and how does it differ from GDP?
GO measures sales across all production stages, while GDP counts only final product values.
Why must nonproduction transactions be excluded from GDP?
They don’t contribute to current production (e.g., financial transfers, secondhand sales).
What are the two methods for calculating GDP?
The expenditures approach and the income approach.
What is the expenditures approach formula for GDP?
GDP = C (Consumption) + Ig (Gross Investment) + G (Government Purchases) + Xn (Net Exports).
What does the income approach to GDP include?
Wages, rents, interest, profits, taxes on production/imports, minus net foreign factor income, plus depreciation and statistical adjustments.
What are the three main categories of Personal Consumption (C)?
Durable goods, nondurable goods, and services.
What is the largest component of Personal Consumption?
Services, making up ~60%.
Why are changes in inventories included in Gross Investment (Ig)?
They represent unconsumed output, contributing to the capital stock.
What does Government Purchases (G) include?
Spending on goods/services for public use, investments in public capital, and R&D.
How are Net Exports (Xn) calculated?
Net Exports = Exports (X) - Imports (M).
What is the largest component of national income?
Compensation of employees, including wages, salaries, and employer benefits.
What is Proprietors’ Income?
Net income of unincorporated businesses (e.g., sole proprietorships).
What are the three categories of Corporate Profits?
Corporate taxes, dividends, and retained earnings.
What are Taxes on Production and Imports?
Sales taxes, excise taxes, property taxes, license fees, and customs duties.
What does National Income (NI) measure?
All income earned through the use of U.S.-owned resources, plus taxes on production and imports.
How is Net Domestic Product (NDP) calculated?
NDP = GDP - Depreciation.
Why is NDP significant?
It measures output available for consumption or reinvestment without reducing future production capacity.
How is National Income (NI) calculated?
NI = NDP - Statistical Discrepancy + Net Foreign Factor Income.
What does Personal Income (PI) represent?
All income received by households, including transfer payments.
How is Disposable Income (DI) calculated?
DI = Personal Income (PI) - Personal Taxes.
Why can’t nominal GDP be compared over time?
Because inflation/deflation affects the value of money.
What is the difference between nominal and real GDP?
Nominal GDP is measured at current prices, while real GDP is adjusted for price changes.
How do you convert nominal GDP to real GDP?
Real GDP = (Nominal GDP) ÷ (Price Index / 100).
What is the purpose of a price index?
To measure price changes relative to a base year for inflation adjustment.
What are nonmarket activities, and how do they affect GDP?
Tasks without market transactions (e.g., stay-at-home parenting) are excluded, understating total output.
What is the underground economy?
Unreported legal/illegal transactions that are not included in GDP, leading to underestimation of output.
How does GDP overlook environmental costs?
GDP includes cleanup costs but doesn’t account for pollution’s negative effects, overstating well-being.
What societal factors does GDP fail to capture?
Leisure, income distribution, product quality improvements, and social well-being.
What is hedonic adjustment?
A method to account for quality improvements in GDP by breaking products into attributes (e.g., smartphone features).
How do free services like Google impact GDP?
Free services aren’t directly included in GDP but hold significant unmeasured value.
Why does GDP not fully reflect economic well-being?
It focuses on production and market transactions, excluding factors like crime reduction, health, and happiness.
What are the four sectors in the circular flow model?
Households, businesses, government, and the foreign sector.
How does the foreign sector impact GDP?
Through net exports, which balance U.S. exports and imports.
What is the difference between GDP and Gross Output (GO)?
GDP measures final goods/services; GO includes all production stages for a fuller economic view.
What is the role of inventories in GDP?
Changes in inventories indicate production not yet consumed, adding to investment.
What are R&D expenditures classified as in GDP?
Investment, as they contribute to innovation and economic growth.
How do durable and nondurable goods differ in GDP?
Durable goods last >3 years (e.g., cars); nondurable goods are consumed quickly (e.g., food).
What is Consumption of Fixed Capital?
Depreciation, reflecting wear and tear on physical assets over time.
Why are imports subtracted in GDP?
They represent foreign-produced goods, not part of domestic output.
How does GDP handle statistical discrepancies?
A balancing adjustment accounts for differences between expenditure and income approaches.
Why does GDP measure market transactions only?
Market prices provide objective value, unlike nonmarket activities.
How does GDP treat leisure?
Leisure time is excluded, even though it improves quality of life.
What is the relationship between Net Investment and economic growth?
Positive net investment indicates growth in the capital stock.
How does GDP treat government transfer payments?
They’re excluded since they don’t reflect current production.
What is National Income (NI) primarily composed of?
Employee compensation, rents, interest, proprietors’ income, corporate profits, and taxes on production/imports.
What is the significance of Disposable Income (DI)?
It represents what households can spend or save, influencing economic activity.
