Part 3 [The Data of Macroeconomics] - 5. Measuring a nation's income - 6. Measuring the cost of living Flashcards
What is the goal of macroeconomics?
To explain the economic changes that affect many households, firms, and markets simultaneously.
What two things does GDP measure at once?
- The total income of everyone in the economy
- The total expenditure on the economy’s output of goods and services
Why is an economy’s income the same an its expenditure?
Because every dollar of spending by some buyer is a dollar of income for some seller.
How could we compute the GDP of a simplified economy resembling a circular flow diagram?
By adding up the total expenditure by households or
By adding up the total income paid by firms (wages rent and profit).
How is the actual economy more complicated than the simplified circular flow diagram?
- Households don’t spend all of their income. They pay some of it in taxes, and they save some for future use.
- Households don’t buy all goods and services in the economy. Some goods and services are bought by government, and some are bought by firms that plan to use them in the future to produce their own output.
What is GDP?
Gross domestic product is the market value of all final goods and services produced within a country in a given period of time.
How does GDP represent market value?
GDP adds together many different kinds of products into a single measure of the value of economic activity. Because market prices measure people’s willingness to pay for different goods, they reflect the value of those goods.
How does GDP include the market value of the housing services provided by the economy’s stock of housing?
- For rental housing, this is the rent which is both the tenant’s expenditure and the landlord’s income.
- For non-income producing households, this is the governments estimate of the property’s rental value, which assumes that the owner pays himself rent, which is included in both his expenditure and his income.
What kind of products aren’t included in GDP because they are to hard to measure?
Most items that are sold illicitly and most products produced and consumed at home.
Why aren’t intermediary goods included in GDP?
Because GDP includes only the value of final goods, and the value of intermediary goods is already included in the price of the final good.
What is an important exception to not including intermediary goods as part of GDP?
When an intermediary good is produced and rather than being used, is added to a firm’s inventory of goods to be used or sold at a later date. In this case, the intermediary good is taken to be final for the moment. and its value as inventory investment is added to GDP. When the inventory of the intermediary good is later used or sold, the firm’s inventory investment is negative, and GDP for the later period is reduced accordingly.
What’s the difference between a good and service?
A service is intangible.
What type of sale of goods isn’t part of GDP and why?
Goods which are resold, like used cars, because GDP only includes goods currently being produced.
Where is GDP measured?
GDP measures the value of production within the geographical confines of a country. Thus, items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of the producer.
What time frame is usually used when measuring GDP.
A year.
How does the government usually report the GDP for a quarter?
At an annual rate. This means that the figure reported for quarterly GDP is the amount of income and expenditure during the quarter multiplied by 4.
Why does the government use the convention of reporting quarterly GDP figures at annual rates?
So that quarterly and annual figures on GDP can be compared more easily.
Why do economists and policymakers seasonally adjust their quarterly GDP figures when monitoring the condition of the economy?
They often want to look beyond regular seasonal changes.
What are the components of GDP and what is the GDP identity?
Consumption (C) Investment (I) Government purchases (G) Net exports (NX) γ = C+I+G+NX
What is consumption?
Spending by households on goods and services, with the exception of purchases of new housing.
What two general types of goods are bought by consumers?
Durable goods (cars, appliances, etc) Nondurable goods (food, clothing, etc)
What is investment in economics and what does it inculude?
The purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories, and structures, including household purchases of new housing.
Why are inventories treated like goods?
Inventories are treated this way because one aim of GDP is to measure the value of the economy’s production, and goods added to inventory are part of that period’s production.
What is included in government spending?
Spending on goods and services by local, territorial, provincial, and federal governments. it includes the salaries of government workers and spending on public works.
Why aren’t transfer payments included in GDP?
Transfer payments alter household income, but they do not reflect the economy’s production. Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are not counted as part of government purchases.
What is net exports, and what else is it also referred to?
Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports); also called the trade balance.
Why do we calculate “net” exports; that is, why do we subtract imports from exports?
This subtraction is made because imports of goods and services are included in other components of GDP (Consumption, Investment, Government purchases)
What is nominal GDP?
The production of goods and services valued at current prices.
