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Macro > Chapter 7: Measuring Domestic Output and National Income > Flashcards

Chapter 7: Measuring Domestic Output and National Income Flashcards

1
Q

What is the purpose of national income accounting?

A

To measure the economy’s performance, monitor growth, and adjust policies as needed.

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2
Q

What is GDP (Gross Domestic Product)?

A

The dollar value of all final goods and services produced within a country’s borders in a specific time period.

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3
Q

Why does GDP count only final products?

A

To avoid double-counting by excluding intermediate goods.

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4
Q

What is the importance of using a monetary measure in GDP?

A

It allows aggregation of diverse goods/services using a common unit for comparison.

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5
Q

What is Gross Output (GO), and how does it differ from GDP?

A

GO measures sales across all production stages, while GDP counts only final product values.

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6
Q

What is “value added” in the context of GDP?

A

It is the market value of output minus the cost of purchased inputs at each production stage.

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7
Q

What is Gross Output (GO), and how does it differ from GDP?

A

GO measures sales across all production stages, while GDP counts only final product values.

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8
Q

Why must nonproduction transactions be excluded from GDP?

A

They don’t contribute to current production (e.g., financial transfers, secondhand sales).

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9
Q

What are the two methods for calculating GDP?

A

The expenditures approach and the income approach.

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10
Q

What is the expenditures approach formula for GDP?

A

GDP = C (Consumption) + Ig (Gross Investment) + G (Government Purchases) + Xn (Net Exports).

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11
Q

What does the income approach to GDP include?

A

Wages, rents, interest, profits, taxes on production/imports, minus net foreign factor income, plus depreciation and statistical adjustments.

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12
Q

What are the three main categories of Personal Consumption (C)?

A

Durable goods, nondurable goods, and services.

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13
Q

What is the largest component of Personal Consumption?

A

Services, making up ~60%.

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14
Q

Why are changes in inventories included in Gross Investment (Ig)?

A

They represent unconsumed output, contributing to the capital stock.

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15
Q

What does Government Purchases (G) include?

A

Spending on goods/services for public use, investments in public capital, and R&D.

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16
Q

How are Net Exports (Xn) calculated?

A

Net Exports = Exports (X) - Imports (M).

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16
Q

What is the largest component of national income?

A

Compensation of employees, including wages, salaries, and employer benefits.

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17
Q

What is Proprietors’ Income?

A

Net income of unincorporated businesses (e.g., sole proprietorships).

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18
Q

What are the three categories of Corporate Profits?

A

Corporate taxes, dividends, and retained earnings.

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19
Q

What are Taxes on Production and Imports?

A

Sales taxes, excise taxes, property taxes, license fees, and customs duties.

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20
Q

What does National Income (NI) measure?

A

All income earned through the use of U.S.-owned resources, plus taxes on production and imports.

21
Q

How is Net Domestic Product (NDP) calculated?

A

NDP = GDP - Depreciation.

22
Q

Why is NDP significant?

A

It measures output available for consumption or reinvestment without reducing future production capacity.

23
Q

How is National Income (NI) calculated?

A

NI = NDP - Statistical Discrepancy + Net Foreign Factor Income.

24
Q

What does Personal Income (PI) represent?

A

All income received by households, including transfer payments.

25
Q

How is Disposable Income (DI) calculated?

A

DI = Personal Income (PI) - Personal Taxes.

26
Q

Why can’t nominal GDP be compared over time?

A

Because inflation/deflation affects the value of money.

27
Q

What is the difference between nominal and real GDP?

A

Nominal GDP is measured at current prices, while real GDP is adjusted for price changes.

28
Q

How do you convert nominal GDP to real GDP?

A

Real GDP = (Nominal GDP) ÷ (Price Index / 100).

29
Q

What is the purpose of a price index?

A

To measure price changes relative to a base year for inflation adjustment.

30
Q

What are nonmarket activities, and how do they affect GDP?

A

Tasks without market transactions (e.g., stay-at-home parenting) are excluded, understating total output.

31
Q

What is the underground economy?

A

Unreported legal/illegal transactions that are not included in GDP, leading to underestimation of output.

32
Q

How does GDP overlook environmental costs?

A

GDP includes cleanup costs but doesn’t account for pollution’s negative effects, overstating well-being.

33
Q

What societal factors does GDP fail to capture?

A

Leisure, income distribution, product quality improvements, and social well-being.

34
Q

What is hedonic adjustment?

A

A method to account for quality improvements in GDP by breaking products into attributes (e.g., smartphone features).

35
Q

How do free services like Google impact GDP?

A

Free services aren’t directly included in GDP but hold significant unmeasured value.

36
Q

Why does GDP not fully reflect economic well-being?

A

It focuses on production and market transactions, excluding factors like crime reduction, health, and happiness.

37
Q

What are the four sectors in the circular flow model?

A

Households, businesses, government, and the foreign sector.

38
Q

How does the foreign sector impact GDP?

A

Through net exports, which balance U.S. exports and imports.

39
Q

What is the difference between GDP and Gross Output (GO)?

A

GDP measures final goods/services; GO includes all production stages for a fuller economic view.

40
Q

What is the role of inventories in GDP?

A

Changes in inventories indicate production not yet consumed, adding to investment.

41
Q

What are R&D expenditures classified as in GDP?

A

Investment, as they contribute to innovation and economic growth.

42
Q

How do durable and nondurable goods differ in GDP?

A

Durable goods last >3 years (e.g., cars); nondurable goods are consumed quickly (e.g., food).

43
Q

What is Consumption of Fixed Capital?

A

Depreciation, reflecting wear and tear on physical assets over time.

44
Q

Why are imports subtracted in GDP?

A

They represent foreign-produced goods, not part of domestic output.

45
Q

How does GDP handle statistical discrepancies?

A

A balancing adjustment accounts for differences between expenditure and income approaches.

46
Q

Why does GDP measure market transactions only?

A

Market prices provide objective value, unlike nonmarket activities.

47
Q

How does GDP treat leisure?

A

Leisure time is excluded, even though it improves quality of life.

48
Q

What is the relationship between Net Investment and economic growth?

A

Positive net investment indicates growth in the capital stock.

49
Q

How does GDP treat government transfer payments?

A

They’re excluded since they don’t reflect current production.

50
Q

What is National Income (NI) primarily composed of?

A

Employee compensation, rents, interest, proprietors’ income, corporate profits, and taxes on production/imports.

51
Q

What is the significance of Disposable Income (DI)?

A

It represents what households can spend or save, influencing economic activity.

Macro (16 decks)

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