Measurement of economic performance Flashcards
National Income Accounting does for the whole economy what _____ accounting does for individual firms.
private
Explanation
National income accounting allows us to keep tabs on the economic health of society and to develop policies that will improve that health.
The basic accounting measure of the output of goods and services is called the Gross ________ Product.
Domestic
Explanation
GDP is defined as the total market value of all final goods and services produced in the economy in one year. It is important to remember that GDP measures total production and not necessarily sales– goods that are not sold but added to inventory must also be included in GDP.
____ measures the market value of annual output and it is a monetary measure.
GDP
Explanation
Suppose in year one a society outputs 6 lbs of apples and 4 lbs oranges and in the next it outputs 4 lbs apples and 6 lbs oranges. The only way we can determine which year had a greater output is to put a price per pound on both the apples and oranges. Suppose the price of apples is $1.00/lb and oranges are $1.20/lb and look at the following table:
There are two sides to GDP: spending and ______.
income
Explanation
What is spent on a product is received as income by those who contributed to the product’s production. GDP can be determined by adding up all that is spent to buy this year’s total output or by summing all the incomes derived from the production of this year’s output.
To avoid double counting, GDP includes only the market value of final goods and ignores transactions involving ________ goods.
intermediate
Explanation
By final goods we mean goods and services purchased for final use and not for resale or for use in further manufacturing processes. Intermediate goods are those that are used to produce other goods that will eventually be sold. In making bread, flour is used as a basic input. When the baker buys the flour from the miller, we do not count this transaction as a sale of a final good. When we sell the bread to the customer who eats it, we count that transaction as the sale of a final good.
GDP excludes non-production transactions involving second hand sales and ________ transactions.
financial
Explanation
These transactions do not pertain to the annual production of the economy. Second hand goods already existed at the beginning of the year and therefore were not produced in that year. Financial transactions like transfer payments and security transactions contribute nothing to the economy, they simply move money from one place to another (i.e. private bank account to the stock market). Any commissions on these transactions would be included in GDP.
The ___________ approach to measuring GDP is to add up all that is spent by various consumers on this year’s total output of final goods and services.
expenditure
Explanation
This measure is sometimes called Gross National Expenditure. The expenditure approach identifies four main types of spending that occurs in the economy. These are consumption (C), investment (Ig), government (G) and net export (X-M or Xn) expenditure.
___________ expenditure (C) is the sale of goods and services to households.
Consumption
Explanation
This includes expenditure by households on durable goods (cars, stereos), semi-durable goods (socks , shoes), non-durable goods (bread, cigarettes), and expenditure on services (lawyer, mechanic, hairdresser). The letter “C” is used to designate this expenditure in the economic equation for GDP:
GDP = C + Ig + G + Xn
Gross _________ expenditure refers to all investment spending by government and business firms.
investment
Explanation
This includes investment in three areas: (1) Final purchases of machinery and equipment by governments and business; (2) all construction; and (3) changes in inventories. Investment in this context does not refer to financial investment, which is merely the sale of debt and equity instruments. The letter “Ig” is used to designate this expenditure in the economic equation for GDP:
GDP = C + Ig + G + Xn
Government ___________ refers to the government purchases of goods and services.
expenditure
Explanation
This includes all purchases including defense expenditures and all current government spending federally, and all other levels of government. This does not include transfer payments and expenditures for servicing the national debt, as well as investment goods (which are included in I). The letter “G” is used to designate this expenditure in the economic equation for GDP:
GDP = C + Ig + G + Xn
__________ expenditure refers to the net sales of goods abroad (exports), less the sales of goods purchased from abroad (imports).
Net export
Explanation
1) We need to add into the GDP equation those goods that are produced for foreign consumption because although we don’t purchase the goods ourselves they still contribute positively to our country’s economy. On the other hand though, goods that we import from other countries have to be taken out of the equation because they do not reflect productivity in our own country.
2) Net exports then is the amount by which foreign spending on our goods and services exceeds our spending on foreign goods and services. If imports are greater than exports, Net exports could be a negative number. The letter “Xn” is used to designate this expenditure in the economic equation for GDP:
GDP = C + Ig + G + Xn
In an economy where personal consumption (C) is 590 billion, gross investment (Ig) is 185 billion, current government purchases (G) are 214 billion, and net exports (Xn) are 48.5 billion, the GDP for that year is ____.5 billion.
1037
Explanation
GDP = C + Ig + G + Xn, so 590 + 185 + 214 + 48.5 = 1037.5
The ______ approach to GDP measures national income as the sum of the incomes received by productive resources in the economy.
Income
Explanation
The Income approach to measuring GDP is called Gross Domestic Income, or GDI. Those who contribute to a good’s production receive what is spent on the product as income - this makes up the GDI. The main categories of income, representing different inputs to production, are: wages (w), rents (r), profits (pi), and interest (i). There is also a miscellaneous category for non-income charges. It is represented by the following equation:
GDI = w + i + r + pi + misc
The largest income category is wages, representing _____ input.
labor
Explanation
This category includes the wages and salaries paid by business and government to suppliers of labor. It also includes compensation to employees in the form of pension contributions, employment insurance premiums, and workers’ compensation. This category is virtually equal to the personal consumption category in the expenditure approach to GDP.
The income earned by the factors of production for their current contributions to production is called the Gross National _______ (GNP).
product
Explanation
1) GNP is the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country.
2) Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service.
3) GNP is the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country.
4) Intermediate services used in the production of the final product are not separated since they are reflected in the final price of the goods or service.
5) On the other hand, the GDP (gross domestic product) measures output generated through production by labor and property that is physically located within the confines of a country and is the standard used in international guidelines for economic accounting. The United States began using the GDP rather than the GNP in 1991.
______ Income is the total income earned by resource suppliers for their contributions to the production of the GNP.
National
Explanation
Subtracting indirect taxes and capital consumption allowances from the GNP derives national income.
________ Income is the income earned that is available to resource suppliers and others before payment of personal taxes.
Personal
Explanation
Personal income is different than National Income because some of the money accounted for in National Income is earned by corporations and some of the money received is not actually earned but is gained through transfer payments (pension benefits, employment insurance, etc.)
__________ Income is personal income minus income taxes.
Disposable
Explanation
Personal taxes include personal income taxes as well as personal property taxes
The _______ flow diagram shows how money and goods and services flow between the various markets and players in the economy.
circular
Explanation
1) In the diagram, all arrows represent the flow of funds; it is important to remember that goods and services flow in the opposite direction for most of the arrows.
2) Line Y from firms to households is identified as GDP because GDP is a measure of the purchase of goods and services from households for production.
3) Out of this arrow are two subsidiary arrows, marked Taxes and Disposable Income. This represents the fact that households pay taxes on their income to the government, and are left with ‘take home’ income, called disposable income (DI).
4) Out of disposable income, households can do two things with their money, they can either buy goods and services from firms (called Consumption or C), or they can save their money (identified as Savings or S). This takes care of the arrows that flow away from households.
A ____ index compares the price of a specific market basket of goods and services in one particular year to the price in a base year.
price
Explanation
The price level is stated as an index number and it measures the combined price of a collection of goods and services (called a market basket) in a given period of time relative to the price of the same collection of goods and services in a base year.
The _________ Price Index measures the prices of a fixed market basket of over 300 consumer goods and services purchased by the “typical” urban consumer.
Cosumer
Explanation
The Consumer Price Index for 2001 would then be calculated as:
1028.5 / 535 = 1.9224 * 100 = 192.2
The number 192.2 indicates that prices have risen by 92.2% since the base year.
The price index that puts all goods and services in the market basket is called the ____ Price Index.
GDP
Explanation
The GDP price index measures the overall price level change, not just a change in price of typical consumer goods. GDP price index is calculated the same as the CPI (consumer price index)– dividing the price of the market basket by the price of the market basket in the base year, and multiplying that by 100.
The term ________ Cycle refers to the recurring ups and downs of economic activity that repeat themselves over a period of time.
Business
Explanation
The economy of all countries in the world experience periods of economic growth and inflation followed by periods of relative stagnation and high unemployment. Depending on the type of economy that is in question, the source of these fluctuations in activity is not always clear.
The phase of the business cycle which is characterized by a period of maximum business activity is called a ____.
peak
Explanation
Here the economy is at full employment and output is at, or close to, capacity
The phase of the business cycle which is characterized by a period of at least six months where there is a decline in total output, income and employment is called a ________.
recession
Explanation
This period is marked by widespread business slowdown but not necessarily price decreases. Prices and wages are not downward flexible so the economy usually “rides-it-out” waiting for an economic boost.
The phase of the business cycle where output and employment begin to move toward full employment is called _________.
expansion
Explanation
Also called recovery. As the recovery phase gains momentum the price level may rise before full employment and output levels have been reached.
The Participation Rate is the ________ labor force expressed as a percentage of the labor force population.
civilian
Explanation
A sustained rise in the general price level of an economy is called _________.
inflation
Explanation
Inflation continues year after year and is not the same as a price level change due to a one-time response to market conditions in the economy. The price level change will eventually end in stable prices, while inflation will continue.
The rule of 70 allows us to calculate the number of years it will take for prices to ______.
double
Explanation
The rule of 70 states that all we have to do is divide the number 70 by the annual inflation rate to find out how many years it will take for prices to double.
____ income measures the amount of goods and services one’s money can buy.
Real
Explanation
Real income is a measure of the purchasing power of one dollar.
If your _______ income rises by 10% in a given year and the price level rises by 5% in the same year, your real income will increase by five percent.
nominal
Explanation
Real income calculates how much buying power you have, because more dollars coming in does not necessary mean more buying power. To calculate real income:
1) The purchasing power of the dollar declines whenever inflation occurs, but a decline in your real income (standard of living) only occurs when your nominal income fails to keep pace with inflation.
2) If you earn $60,000 (nominal income) in a year with a CPI (consumer price index) of 120 then to maintain your standard of living when the CPI increases to 150, your nominal income must increase to $75,000. (60,000 / 120 = 75,000 / 150). The relationship is held constant from year to year.
Inflation caused by excess demand in the economy is termed _______ pull.
demand
Explanation
Demand pull inflation results when there is generally greater demand for goods and services in the economy than can be supplied by firms. It is characterized by strained resource use which can be identified by overtime, job vacancies, etc.
_________ inflation occurs when the cost of inputs to production increase thus making the cost of the goods and services increase.
Cost push
Explanation
Cost push inflation can arise from price increases of any resource used in production (wages, interest rates, fuel) It is characterized by increasing unemployment while prices are still rising.
A cost of living allowance adjusts workers’ income automatically to inflation. ____ clauses turn price level increases into wage increases.
COLA
People who lose during inflation are those who hold bonds or have ____ incomes.
fixed
Explanation
Inflation decreases the purchasing power of a set amount of money (savings). When the rate of inflation exceeds the rate of interest, the real value of the saved money decreases.
