Part 3. Aggregate Output, Price and Economic Growth Flashcards
GDP
The total market value of goods and services produced in a country within a certain time period.
- Includes only purchases of newly produced goods and services
i. e. market value of final goods and services not resold or used in production, provided by gov such as policing, roads, value of owner-occupied housing. - Not include transfer payments i.e. unemployment, retirement, welfare benefits
Expenditure approach (GDP)
GDP calculated by summing amounts spent on goods and services produced during the period.
Income approach (GDP)
Summing the amounts earned by households and companies during the period, including wage income, interest income and business profits.
Value of final output method
= expenditure method to summing the values of all final goods and services produced.
Sum of value added method
- GDP calculated by summing the additions to value created at each stage of production and distribution.
Nominal GDP
The total value of all goods and services produced by an economy, valued at current market prices.
Since its based on current prices, inflation will increase value even if physical output of goods and services remain constant from 1 year to the next.
Real GDP
This measures the output of the economy using prices from a base year, removing the effect of changes in prices so inflation is not counted as economic growth.
GDP deflator
A price index that can be used to convert nominal GDP into real GDP taking out effects of changes in overall price level.
Per-capita real GDP
The real GDP divided by population and often used as a measure of economic well-being of country’s residents.
GDP equation (expenditure approach):
GDP = C + I + G + (X-M)
or
GDP = (C + Gc) + (I + Gi) + (X-M)
where:
Gc = government consumption
Gi = government investment (capital goods, inventories)
GDP equation (income approach):
GDP/GDI = national income + capital consumption allowance + statistical discrepancy
Capital consumption allowance (CCA):
This measures the depreciation of physical capital from product of goods and services over a period.
- The amount that would be reinvested to maintain the productivity of physical capital from one period to the next.
Statistical discrepancy
An adjustment for the difference between GDP measured under the income approach, and expenditure approach because they use different data.
National income
The sum of the income received by all factors of production that go into the creation of final output.
national income = compensation of employees (wages and benefits) + corporate and government enterprise profits before tax + interest income + unincorporated business net income (business owners income) + rent + indirect business taxes - subsidies (taxes and subsidies that are included in final prices).
Personal income
A measure of pretax income received by households and is an determinant of consumer purchasing power and consumption.
Includes: all income households receive, including government transfer payments such as unemployment or disability benefits.
Household/personal disposable income
This is personal income after tax, measuring household have available to either save or spend on goods and services, and an important indicator of the ability of consumers to spend and save.
Total income, which must equal total expenditure is:
GDP = C + S + T
where:
C = consumption spending
S = household and business savings
T = net taxes ( taxes paid minus transfer payments received)
Consumption
A function of disposable income, with additional disposable income either consumed or saved.
MPC = proportion of income spent on consumption. MPS = proportion of income saved.
MPC + MPS must equal 100%
Investment
A function of expected profitability (dependent on overall level of economic output) and cost of financing (reflected in real interest rates, approx. nominal interest rates minus expected inflation rate).
Government purchases
An independent economic activity to a degree, but tax revenue to the government, hence fiscal balance is a function of economic output.
Net exports
A function of domestic disposable incomes (affect imports), foreign disposable incomes (affect exports), and relative prices of goods in foreign and domestic markets.
IS curve (income-savings)
The negative relationship between real interest rates and real income for equilibrium in the goods market, the curve being a combination of real interest rates and income for which planned expenditures equal income.
LM curve (liquidity-money)
This illustrates the positive relationship between real interest rates and income consistent with equilibrium in money market.
Aggregate demand curve
This shows the relationship between the quantity of real output demanded (= real income), and price level, given income is equal to planned expenditures (IS curve) and money demand is equal to money supply (LM curve).
- LM curve meant we held real money supply (M/P) constant, now if we hold nominal money supply (M) constant, changes in real money supply are due to changes in price level (P).
- An increase in price level will decrease real money supply (M/P) and decrease in price level will increase real money supply (M/P).