Intro to Macroeconomics And National Income Accounting Flashcards
Macroeconomics
Is the study of the structure and performance of national economies and policies government use to try to affect economic performance.
Issues macroeconomists address include;
- What determines a nation’s long-run economic growth?
- Why does a nation’s economic activities flactuate?
- What causes unemployment
- What causes prices to rise
- How does being part of the global economic system affect nations’ economy
- Can government policies be used to improve a nation’s economic performance?
Average labor productivity
The amount of output produced per unit of labor input.
Business Cycle
This refers to the short-run, but sometimes sharp contractions and expansions in economic activity.
Recession
The downward phase of a business cycle during which national output may be falling or perhaps growing only very slowly
Unemployment rate
The number of unemployed divided by the total labor force [the number of people working or seeking work]
Open economy
Is the type of economy that has extensive trading and financial relationships with other national economies
Trade surplus
When export exceeds import
Trade deficit
When import exceeds export
Macroeconomic policies [2]
- Fiscal Policy
2. Monetary Policy
Fiscal Policy
Fiscal Policy is determined at the national, state, and local levels and is concerned about government spending and taxation.
Monetary Policy
Determines the rate of growth of the nation’s money supply and is under the control of a government institution known as the central bank
Aggregation
Aggregation is the process of summing individual economic variables [aggregate consumption, aggregate investment] to obtain economic-wide totals.
Economic theory
Is a set of ideas about the economy that has been organized in a logical framework
Economic model
A simplified description of some aspect of the economy, usually expressed in a mathematical form
Gross Domestic Product
Is the market value of goods and services newly produced within a fixed period of time, within the geographical boundaries of a country.
The Classical Approach
The principle of the Classical approach is based on two assumptions : people pursue their own economic self interests and that prices adjust reasonably quickly to achieve equilibrium in all markets. This is largely due to the “invisible hand” proposed by Adam Smith.
Keynesian Approach
The keynesian approach, named after the proponent, John Maynard Keynes, holds that prices of goods and services or demand and supply doesn’t adjust rapidly as in classical approach, thus to solve the problem of imbalance, government must buy more which in turn will result in a high demand of labor.
National Income Accounting
The measurement of production, income, and expenditure.
National Income Accounts
These are accounting frameworks used in measuring current economic activity.
National Income accounts are measured in terms of;
- The amount of output produced, excluding output used up in intermediate stages of production [the product approach]
- The income received by the producers of out [the income approach]
- The amount of spending by the ultimate purchasers of output [the expenditure approach]
The Product Approach [2*]
Measures economic activities by adding the market values of goods and services newly produced, excluding any goods and services used up in intermediate stages of production.
The product approach measures economic activities by summing the value added by producers.
Value Added Concept.
The value added concept of any producer refers to the its output minus the value of input purchased from other producers.
Capital Good
Is a type of final good that is itself produced [which rules out natural resources such as land] and is used to produce other goods; however unlike intermediate goods, capital goods are not used in the same period that it is produced.
Intermidiate goods and services
These are those used up in the production of other goods and services in the same period that they themselves were produced.
[T/F] GDP counts both intermidiate and final goods and services
False. [only final goods are counted]
Inventory
Inventories are stocks of unsold finished goods, goods in process, and raw materials held by firms.
It is the amount by which inventory increase during the year
Inventory investment. [Note: when inventory declines during the year, inventory investment is negative]
Inventory Investment. 2.
Is the change in the physical quantity of goods in inventory multiplied by their price.
Gross National Product [GNP]
Is the market value of goods and services newly produced by domestic factors of production during the current year.
Net Factor Payment From Abroad [NFP]
Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy.
Formula for GDP [In relation to GNP]
GDP = GNP - NFP
Elements of the expenditure approach to calculate GDP
- Consumption = C
- Investment = I
- Government purchases of goods and service = G
- Net export of goods and services = NX
Elements of the expenditure approach to calculate GDP
- Consumption = C
- Investment = I
- Government purchases of goods and service = G
- Net export of goods and services = NX
Formula for measuring GDP using the expenditure approach
Y = C + I + G + NX.
Income-expenditure identity
Y = C + I + G + NX
Consumption [2pts]
Consumption is spending by domestic households on final goods and services, including those produced abroad.
Later, imports is subtracted from total expenditures, and exports are added to calculate total spending on the goods and services produced by the domestic economy.
The largest component of expenditure
Consumption
Categories of expenditure
- Consumer durables
- Nondurable goods
- Services
Consumer durables
They are long-lived consumer items, such as cars, furniture, and major appliances (but not houses, which are classified under investment)
Nondurables.
These are short-lived items such as food, clothing, and fuel.
Investment
Investment includes both spending for new capital goods, fixed investment, and increases in firms’ inventory holding, called inventory investment.
Components of fixed investment
- Business fixed investment
2. Residential investment
Business fixed investment
This is spending by businesses on structures and equipment and software
Residential investment
Construction of new houses and apartment buildings q
[T/F] Increases in inventories are included in investment spending, regardless of why inventory rose
True.
Transfers
payments by the government that are not made in exchange for goods and services.
Example, payments for social security, unemployment insurance, welfare payments
[T/F] Transfers are included in the government purchases category and are counted in GDP
False.
[T/F] Interest payments on the national debt are counted as part of government purchases
False.
Income approach to calculate GDP
Summation of incomes received by producers, including profits, and taxes paid to the government.
A key part of national income is a concept known as…
National Income
National Income is the sum of eight types of income; [Hint: BCcubePRTN]
- Compensation of employees
- Proprietors’ income
- Rental income of persons
- Corporate profits.
- Net interest
- Taxes on production and import
- Business current transfer payments
- Current surplus of government enterprise
Compensation of employees
The income of workers (excluding the self-employed) and includes wages, salaries, employee benefits and employer contributions to Social Security.
Proprietors’ income
Is the income of the nonincorporated self-employed.
[T/F] Proprietors’ income includes both labor income and capital income
True. Because many self-employed people own some capital (examples are a farmers tractor or a dentist’s x-ray machine)
Rental income of persons
Is the income earned by individuals who own land or structures that they rent to others.
Corporate profits
They are the profits earned by corporations and represents the remainder of corporate revenue all costs have been paid
Net interest
Interest earned by individuals from businesses and foreign sources minus interest paid by individuals
Taxes on production and import
Includes indirect taxes, such as sales and excise taxes, that are paid by businesses to the government
Business current transfer payments
Payments made by businesses to individuals or governments or foreigners, but not for wages or taxes or as payment for services.
Current surplus of government enterprise
Is essentially the profit of businesses that are owned by governments, such as water, electric, and housing firms.
In addition to the 8 components of national income, 3 other items need to be accounted for to obtain GDP:
- Statistical discrepancy
- Depreciation
- Net Factor Payments.
Statistical discrepancy
The production measure minus the income measure. This is because data on income are compiled from different sources than data on production.
A positive statistical discrepancy means that…
the income measure adds up to less than the production measure.
National Income plus the statistical discrepancy equals…
Net National Product (NNP)
Depreciation is also known as
Consumption of fixed capital
Depreciation
Is the value of capital that wears out during the period over which economic activity is being measured.
Why is depreciation added back to compute the gross amount of income?
Because depreciation is subtracted from the components of income (specifically, proprietors income, corporate profits, and rental income)
Sum of the Net National Product and depreciation is…
Gross National Product (GNP)
Gross National Product and Gross Domestic Product are called gross because…
They measure the nation’s total production or output of goods and services without subtracting depreciation.
Private disposable income
Measures the amount of income the private sector (businesses and households) has available to spend.
Mathematically, private disposable income is
Private disposable income = Y + NFP + TR + INT - T
Y - GDP NFP - Net Factor Payment TR - Transfer INT - Interest T - Taxes
Part of the GDP that is not at the disposal of the private sector is
the net income of the government sector
Mathematically, net government income is
Net government income = T - TR - INT.
T - taxes
TR - Transfer payments
INT - Interest payments
Mathematically, GNP equals
[private disposable income] plus [net government income]
Y + NFP [Note, the formula is simplified]
Mathematically, private saving
Private disposable income less consumption
[Y + NFP + INT +TR - T] - C
Private saving rate
Private saving divided by private disposable income
Government saving
Net government income less government expenditure/ government outlays
[T - INT - TR] - G
Government budget surplus is the same as
Government saving
Budget deficit
When government receipt are less than government outlays. Government savings become negative
Mathematically, national savings is
Y + NFP - C - G
[I + C + NX + G] + NFP - C - G
I +[NFP + NX]
where NFP + NX = CA (Current account balance)
I + CA
Uses of private savings [3pts]
- Used to fund new capital investments
- Finance government budget deficit
- Financing the current account balance / acquiring assets from or lending to foreigners
Mathematically, current account balance is
NFP + NX
Flow variables
Variables that are measured per unit of time or is the rate of change in a stock variable
Stock variable
Variables that are defined at a point in time eg. Amount of money in your bank account of September 15 of this year.
Norminal variables
Economic variables measured in current market values
Real variables
Economic variables measured by the prices of a base year.
Real GDP [Constant-dollar GDP]
Measures the physical volume of an economy’s final production using the prices of a base year
Norminal GDP [Current-dollar GDP]
Measures the dollar value of an economy’s final production measured at current market prices.
[T /F] Real GDP and Norminal GDP are the same for the base year
True.
Price index
Is a measure of the average level of prices for some specified set of goods and services, relative to the prices in a specified base year.
