Chapter 9 Concepts and Terms Flashcards
Wealth is a stock
like a lake—your bank account balance, plus the portion of your car that you own, plus the portion of your house that you own.
Income is a flow
like
a river—how much your paycheck is. So income re ects value creation, while wealth re ects accumulated past value that has been saved.
those sold to a final user
final goods
those not sold to a final user
intermediate goods
the current market value of all final goods and services produced within the country’s borders in one year
Gross Domestic Product (GDP)
GDP tells us…
how big an economy is
GDP does not count all transactions that take place because there are no records or market values for some production, and because other transactions would cause double counting
• Production of underground illegal goods, such as heroin, is not counted because we have insuf cient records.
• Production of underground legal goods—working off the books—is not counted because we have insuf cient records.
• Production that does not enter markets, such as being one’s own cook, maid, or car repairman, is not counted because we have insuf cient records.
• Sales of used goods are not counted since the original sale was counted. But services of middlemen in selling used goods are counted.
• Financial transactions—sales of stocks, bonds, and the like—are not counted because either; most are not original sales, so they are like used goods, or, if they are original sales, used to nance
the acquisition of capital, we count the capital, so we don’t count the funds raised to purchase the capital. To do so would be like counting the $20,000 you paid for the new car and the $20,000 car loan you received—the output involved is only $20,000, not $40,000. However, services of nancial professionals are counted in GDP, just like with used goods
• We do not count government transfer payments—taking from one person and giving to another, but not in return for any good or service—such as social security, unemployment insurance checks, and food stamps.
• We do not count the value of leisure—though we count tickets to Six Flags, MMO subscriptions, and other market activity that accompanies an individual’s leisure time.
• We do not subtract bads—unwanted phenomena such as disease, crime, and garbage. Keynesian economists assert that bads may, paradoxically, increase GDP because we pay to lessen their effects—such as hiring policemen to combat a new crime wave. Keynesians are correct in pointing out that the crime wave would make us worse off. However, Keynesians err in thinking that GDP will rise, since people must give up goods in order for government to hire policemen. Hence, people have fewer pizzas and more policemen, so GDP does not rise. Different outputs are produced, as happens in Bastiat’s broken window story.
taking from one person and giving to another, but not in return for any good or service
transfer payments
unwanted phenomena such as disease, crime, and garbage
bads
to discuss GDP, which is the usual approach that is discussed on the news and in the most referenced government reports. With this approach, we add up the current market values of all nal goods and services.
the expenditure approach
The expenditure approach breaks GDP down by the four groups who spend on nal output.
adds up all the payments to factors of production—the wages, interest, rents, and pro ts—generated by production. Government uses this method because they gather these data as people pay taxes
the income approach
Income ≡ Output
the ≡ symbol, says that though income and output are de ned in different ways, they are equal.
spending by consumers on nondurable goods, durable goods, and services. Durable goods are those which last for at least a year.
Consumption
spending by business on capital (plant, equipment, tools, etc.), changes in business inventories, and spending on new residential housing. Note, this does not mention stocks or bonds.
Investment
spending by all levels of government on goods and services. Note that transfer payments do not fit this definition.
Government Purchases
Exports - Imports. Note that this makes it seem as if “Exports, good. Imports bad,” which is contrary to what we learned in the trade chapter.
Net Exports
which is what GDP would be if prices had remained the same as they were in a base year.
Real GDP
When we look at how well the economy is doing over time, we…
always use Real GDP to remove the effects of in ation and only look at how many goods and services we are producing.
if we are comparing values at a single point in time, we…
might use GDP (which we could call nominal GDP or current dollar GDP)
the percentage change in Real GDP. It is the best measure of whether an economy
is getting better or worse
Economic growth
We only look at growth rates in…
Real GDP
Two successive quarters (three month periods) of negative economic growth is called?
recession
in ation is caused by…
increases in the money supply, not by increases in output
Economic growth is not a cause of the in ation -
it is a short run result of money growth.
Note that since the negative growth rates began, the positive growth was rarely at least 3%, which we classify as strong.
Just Saying
In the third quarter of 2014 the economy grew by 4.9%, and four of the last ve quarters have been strong.
again…
describes the ups and downs of the economy
The business cycle
an increase in Real GDP is called an
expansion
the business cycle, Real GDP is at a temporary high.
peak
Real GDP falls, the economy is suffering a
contraction
of the business cycle, Real GDP is at a temporary low
trough
Real GDP grows from the trough
recovery
There is no specific length of time that a recovery must continue before we call it an expansion, though a usual guidepost involves unemployment falling to pre-recession levels
Some use the language incorrectly, for instance, saying that the US was in recession from 2008 through 2013, because unemployment was so high. In truth, the US was in a sickly recovery that could not bring unemployment down to its pre-recession levels
following the 1980s recession, growth is very strong—over a year at 6% or more
following the 2008 recession, growth is mostly sickly, at around 2%…A growth rate of 3% is considered strong
GDP tells us the size of the economy
To compare to other countries, we need to convert using some sort of exchange rate. We also use GDP for comparisons with other current dollar measures of economic and government activity.
Real GDP is used to examine economic growth over time
since it removes the effects of changing prices.
Neither measure illustrates the wellbeing of the people in a country. For this, we use
Per Capita GDP; GDP divided by the population
Per Capita GDP is the best measure we have, though it is not perfect because it does not take account of the distribution of income within a country
The World Bank’s estimates of Per Capita GDP have the US as the major industrialized country with the highest Per Capita GDP—about $50,000.
The average US resident is about 25% better off than the average Canadian, which is signi cant, given that for an individual working at a job, a 25% raise is large.
dont cha know
In evaluating any measure of economic health, both the level of economic achievement and also economic growth must be considered
The average US resident would not want to trade living standards with the average Chinese resident. But, if China grew at an amazing long-term rate of 10% per year, while the US grew at a satisfactory 3% per year, China’s populace would be, on average, as well off as the US populace in 23 years.
Economic growth is not only related to the level of economic freedom, but also to the change in economic freedom
If a state that has no economic freedom grants a small amount of economic freedom, it might experience huge economic growth, raising the population from horrible living standards to less horrible living standards.
For instance, if the state moves from a policy of no person being able to open any business to a policy that only men over fty years old can open a business, the initial growth rates due to the expansion of freedom might
be huge, compared to mature countries where men and women, young and old, can open a business.
But that does not mean that the particular policy is correct—only that the direction is correct. So as a country like China chooses more economic freedom, they move in the correct direction, but that does not mean that every policy they have—from limited internet access, to the one-child policy, to severely limited rights to own a home, to their still huge government ownership of much of the means of production—is good.
