Chapter 7: Measuring Domestic Output and National Income Flashcards
National Income Accounting
Operates in much the same way for the economy as a whole
Bureau of Economic Analysis (BEA)
Compiles the National Income (NI) and Product Accounts (NIPA) for the U.S. economy
What does National Income Accounting enable economist and policymakers to do? (3 things)
(1) Access health of economy by comparing levels of production (regular intervals)
(2) Track the long term course of the economy
(3) Formulate policies that will safeguard/improve the economy.
Gross Domestic Product (GDP)
The total market value of all goods and services produced within a given year in the borders of one specific country.
Aggregate Output
Primary measure of the economy’s performance is in annual total output of goods and services
Monetary Measure
GDP is a monetary measure – it compares the relative values of the vast number of goods and services produced in different years
Intermediate Goods
Goods and services that are purchased for resale or for further processing or manufacturing
Final Goods
Goods and services that are purchased for final use by the consumer
Why is the value of final goods included in GDP but the value of intermediate goods excluded?
Because the value of final goods already includes the value of intermediate goods that were used in producing them.
Value Added
Market value of a firm’s output less the value of the inputs of the firm has bought from others
What factors of the economy are not included in GDP?
Non-production Transactions:
(1) Financial Transactions
(a) Public transfer payments - Social Security, welfare, payments
(b) Private transfer payments - no output; money given to a child on christmas
(c) Stock market transactions - the buying and selling of stocks and bonds create nothing in way of current production
(2) Secondhand Sales - selling your car to another person does not generate production
(3) Illegal/Black Market Transactions
(4) Government Purchases
What are two ways at looking at the GDP?
Spending (output/expenditures approach) and Income (allocations/income approach)
Output/Expenditure Approach
The sum of all the money spent in buying a specific good
Allocation/Income Approach
The income derived or created from producing a specific good
Personal Consumption Expenditures (C)
Term that covers all expenditures by households on durable consumer goods (cars) , nondurable consumer goods (bread), and consumer expenditure for services (doctors)
Gross Private Domestic Investment (Ig)
Includes…
(1) All final purchases of machinery, equipment, and tools
(2) All construction
(3) Changes in inventories
Net (Private Domestic) Investment = NI
Net Investment = Gross investment - depreciation
GDP Calculation
C + Ig + G + XN [X - M] = GDP
Consumer Expenditure + Gross Investment + Government Spending + Net Exports = GDP
Corporate Profits
(1) Corporate Income Taxes: These taxes are levied on net earnings and flow to the government
(2) Dividends: ultimate owner of corporations
(3) Undistributed Corporate Profits: money spent elsewhere is saved and investing later.
Indirect Business Taxes
Include general sales taxes, excise taxes, business property taxes, license fees, and custom duties
Consumption of Fixed Capital
Depreciate charge made against private and social capital each year
Net Domestic Product (NDP)
Simply GDP adjusted for depreciation
NDP Calculation
NDP = GDP - consumption of fixed capital (depreciation)
National Income (NI)
How much an American has earned for their contribution of land, labor, capital, and entrepreneurial talent
NI Calculation
NI = NDP - NFFIEUS - Indirect business taxes
Personal Income (PI)
All income received whether earned or unearned
Disposable Income (DI)
Personal income less personal taxes
DI Calculation
PI - Personal Income Taxes = Disposable Income
Nominal GDP
A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP or NOMINAL GDP.
Real GDP
A GDP that has been deflated or inflator to reflect changes in the price level
GDP Price Index
A measure of the price of a specific collection of goods and services called a “market basket,” in a given year as compared to the price of an identical collection of goods and services
Price Index Calculation
Price index in given year = (Price of market basket in specific year / Price of same market basket in base year) x 100
How to find Real GDP?
Nominal GDP / price index (in hundredths)
