EXAM 2 Flashcards
gross domestic product (GDP)
the MARKET VALUE of all FINAL GOODS produced IN A COUNTRY in a PERIOD OF TIME
market value
value to buyers / cost of production of all durable and non-durable goods/services
market value calculation
price x quantity
what is included in GDP?
final goods and services,
produced in the country’s borders,
produced in the measured period, not after
what is not included in GDP?
intermediate goods,
used goods (resales),
financial transactions (stocks & bonds),
illegal activities,
unpaid household chores
final goods and services
sold to end consumers, calculated in GDP
intermediate goods
used up in production, not calculated in GDP
durable goods
last more than one year
non-durable goods
last less than one year
nominal GDP
measured in CURRENT PRICES, reflects DOLLAR VALUE of all goods and services produced
real GDP
measured in CONSTANT PRICES (base year), reflected PHYSICAL QUANTITY of goods and services produced
real GDP calculation
price (base) x quantity (current)
4 components of total spending
consumption + investment + government + net exports
(C+I+G+NX)
consumption (C)
spending by household on final goods and services, except the purchase of new housing (investment)
investment (I)
business spending on equipment, investments, and structures (includes new housing)
government purchases (G)
government spending on goods and services (defense, salaries)
what is not included in gov’t purchases?
transfer and investment payments (social security, medicare, national debt interest)
net exports (NX)
exports minus imports
consumer price index (CPI)
measures overall level of prices for goods/services bought by a typical consumer (baskets)
3 measurement biases
substitution bias,
new goods,
quality improvement/changes
substitution bias
ignores consumer switching to cheaper alternatives
new goods
increases choices, but CPI doesn’t account for them immediately
expenditure calculation
price x FIXED quantity
CPI calculation
exp. current / exp. base
inflation calculation given CPI
(new CPI - prev CPI) / (prev CPI) x 100
deflating
convert nominal to real values to account for inflation
delating an interest rate calculation
real rate = nominal - inflation rate
indexing
adjusting payments according to CPI to maintain purchasing power
bonds
debt instrument where the issuer (borrower) promises to pay interest and principal
stocks
ownership in a company, enlisting the holder to a share of profits (dividends)
saving
income NOT SPENT on consumption; provides funds for investment
S = current income (Y) - consumption (C) - gov’t spending (G)
saving calculation
current income - spending for current need
private saving calculation
(Y - T) - C
(production - tax) - consumption
what is included in private saving?
personal/household,
corporate
what is included in personal/household saving?
life cycle, precautionary, bequest
what is included in corporate saving?
profit, retained earnings, for future investment
public saving calculation
T - G
tax revenue - government spending
tax revenue > government spending
surplus
tax revenue < government spending
deficit
4 factors affecting bond interest rate
- credit risk
- term to maturity
- tax treatment
- inflation protection
credit risk
higher the risk, higher the interest rate
term to maturity
long-term bonds, higher interest rate
tax treatment
tax-exempt bonds (municipals), lower interest rate
inflation protection
if prices increase, payments increase proportionally
when do saving curves shift?
when household or government funds change
what happens to saving when government spending decreases?
saving also decreases
when do investment curves shift?
when firms change investment plans
taxes net of transfers (T) calculation
T = taxes - transfer payments
