Chapter 8 Flashcards
gross domestic product
the market value of all FINAL goods and services produced IN A COUNTRY during a period of time, typically one year
GDP=
sum of all goods
final good or service
purchased by a final user
these are what are used to calculate GDP
why use final goods and services?
if we counted intermediate goods and services as well, ones that were inputs into another good or service, such as a tire on a truck, then there would be double counting
to measure total output in a given year, we measure goods and services produced
only in that given year
(avoids double counting)
if a new car was produced in 2018 and sold in 2019
it would be counted in 2018 GDP, not 2019 GDP
there are two main conceptual ways to measure the total economic activity in an economy:
- total production
- total income
when we measure one, we are also measuring the other, why?
everything that is produced and sold constitutes income or someone
transfer payments
payments to households for which the government does not receive a good or service in return
example of transfer payments
social security and welfare programs
imports
households buy goods and services to households in other countries
exports
firms sell goods and services to households in other countries
households elect not to spend some of their income,
and instead save it with financial system firms like banks
- these banks lend money to other firms and the government
who measures GDP
bureau of economic analysis (BEA)
four categories of expenditures
- personal consumption expenditures, “consumption” (C)
- gross private domestic investment. “investment” (I)
- government consumption & gross investment, “government purchases” (G)
- net exports of goods and services, “net exports” (NX)
GDP=
Y=C+I+G+NX
consumption
spending by households on goods and services, not including spending on new houses (under investments)
consumption- service
landscaping, daycare, concert, lodging
consumption-nondurable goods
consumables, foods, drinks, clothes
consumption- durable goods
car, appliances, furniture, tools
investment
spending by forms on new factories, office buildings, and additions to investories, plus spending by households and firms on new houses
investment- business fixed investment
new buildings, equipment, intellectual property
investment- residential investment
building a new house
investment- changes in business inventories
goods that have been produced but not yet sold
government purchases
spending by federal, state, local government on goods and services
government purchases examples
teachers’ salaries, highways, aircraft carriers
transfer payments are NOT included in GDP, why?
because they do NOT result in the production of a goods or services
the “G” in the GDP equation is
government purchases, not total government expenditures
net exports
defined as the value of export (X) - imports (M)
net exports equation
NX= X - M
The us has negative NX which means
we import more than we export (trade deficit)
since we want to count ___ production, we add up the value of goods and services sold to foreigners, and subtract off the value of the goods and services sold to americans by foreigners
domestic
the subtracting of exports is really an issue of
accounting, does not affect GDP directly
Imports are not inherently bad
accounting issue is not hurting the economy
consumption is the largest component of GDP; within that, services are the largest component-
usa= “service economy”
value added
the market value a firm adds to a product
-shows that the final selling price of a good must equal the sum of all values added in all steps of the production process
what is an alternative method to measure GDP
value added
household production
childcare, cleaning, and cooking not typically paid for with money
if done and paid for by a non-household-member, it would be counted in GDP
the underground economy
“blackmarket”
trading hidden
-avoid taxes or regulations
-or because the goods and services are illegal
may be 10% or more of the economy in america, higher in low-income households
if we are comparing GDP from year to year, the size of household production and the underground economy is probably about the same from year to year
GDP growth is a reasonable measure at the growth in total production
Issues with GDP over long periods of time
increase in GDP may exaggerate the increase in actual total production
in many developing countries, the informal sector is very large;
often above 50% of total output
development economists say this often reflects poor government policies
higher taxes and regulations
low confidence in the security of private property from government seizure
GDP per capita would not reflect
the value of leisure
pollution or other negative effects of pollution
crime, other social problems
distribution of income
example of improvements that result in lower GDP per capita
lower crime
-allows lower spending on police, prisons, and private security
-this decreases GDP
military spending is part of the ____ portion of GDP
government purchases (G)
WWII GDP stats
production was very high, but mostly military goods- people weren’t better off
after WWII, GDP fell;
- but production of consumption goods rose rapidly
nominal GDP
the value of final goods and services evaluated at current-year prices
real GDP
the value of final goods and services evaluated
- we adjust this years number for inflation
real and nominal GDP are ___ in the base year
equal
growth figures reported in the media are the growth in real GDP
prices have generally increased since 2012
today: real GDP< nominal GDP
prior to 2012: real GDP> nominal GDP
relative prices
a ratio of prices
asking: a good is worth how many of the other good?
chain weighted prices
based on geometric means of growth rates weighted on last year prices (X) and this year prices (Y)
chained growth rate=
square root X x Y
price level
a measure of the average prices of goods and services in the economy
price level, why?
stable prices are desirable because they allow households, firms, and government to plan for future
GDP deflator
a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
GDP deflator
nominal GDP/real GDP x 100
percentage change
new-old/old
percentage change in GDP deflator,
give us estimate of the change in price level
gross national product (GNP)
production performed by citizen’s of a nation, including overseas production
national income
GDP minus the consumption of fixed capital
ex. gdp-depreciation
personal income
income received by households; including transfer payments, but excluded firms’ retained earnings
disposable personal income
personal income minus personal tax payments; this measures the amount that households are able to spend or save
all products must be rewarded with
income
data limitations
there is always some “statistical discrepancy”
