Test #2 (chapter 7) Flashcards
What is the national accounts and what does it include?
*the accuracy of a country’s accounts is a remarkably reliable indicator of its state of economic development (more reliable generally = more economically advanced)
- Canada’s numbers are calculated by statistics Canada
Keeps track of…
- consumer spending
- government purchases of goods and services
- investment spending
- exports and imports
What is GDP? What is GDP per capita?
GDP = market value of all final goods and services produced within a country in a year OR you can look at it as the total income generated by the economy
GDP per capita = GDP divided by the size of the population; equivalent to the average GDP per person
(makes up for the fact that bigger countries naturally have bigger GDP)
To avoid multiple counting, which goods are included or left out of the GDP calculation?
Only final goods and services are counted:
= goods and services purchased for final use (ex. i purchase a car)
Intermediate goods are not counted:
= goods for resale or manufacturing (ex. automobile manufacturer’s purchase of steel to make the car)
What is does “value added” mean in GDP
When calculating GDP we only count each producer’s “value added” which is the difference between the value of its sales and the value of the intermediate goods and services it purchases from other businesses
Specifically, what are the examples of what is included and not included in the GDP calculation
Included:
- domestically produced final goods and services
- capital goods (things like machinery, equipment, and tools that are used as productive inputs)
- new construction of structures
- changes to inventories
Not included:
- intermediate goods and services
- inputs
- used goods
- financial assets
- goods and services produced abroad
- volunteered work, underground/illegal activities
- HH (household) production
- environmental damage
Briefly explain the 3 methods for calculating GDP
- Value-Added Approach : add up the total value of all final goods and services produced (find the difference between the value of its sales and the value of the intermediate goods and services it purchases from other businesses)
- The Expenditure Approach: add up all spending on domestically produced final goods and services
- The Income Approach: add up total factor income earned by households from firms in the economy (+any non-factor payments - ex. taxes or capital depreciation)?
(factor income = income earned by factors of production, which includes wages, interest, rent dividends, and profits)
When you break down GDP into the four sources of aggregate expenditure, what equation do you get?
GDP = C + I + G + X - IM
C = consumption
I = investment
G = government expenditure
X = exports
IM = imports
What is aggregate expenditure?
The total flow of funds into markets for domestically produced final goods and services; the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports
What is factor income and what does it include?
Factor income = income earned by factors of production - includes wage, interest, rent, and profit
What are non-factor payments? How does this play into the income approach to calculating GDP
Non-factor payments consist of the income earned by the federal government as a result of the production of goods and services
- or… the difference between the prices paid for final goods and services and the amount received by factors of production
ex. net indirect taxes –> indirect taxes like provincial and federal sales taxes - any subsidies paid to purchasers
another ex. = capital depreciation
INCOME approach:
- add factor incomes and non-factor payments
What is the difference between real GDP and nominal GDP?
Real GDP = calculated using the prices of a base year
- calculates the total value of final goods and services calculated as if prices had stayed constant at the level of some given base year
Nominal GDP = calculated using current prices
- this overstates the growth in output
How do economists measure the aggregate price level? What is the aggregate price level?
They calculate the cost of purchasing a market basket (a hypothetical set of goods and services - decide on a fixed quantity so that we can track price changes)
- used to make a price index
It is a single number representing the overall price level for final goods and services in the economy
How do you calculate the price index in a given year?
(Cost of market basket in a given year) / (Cost of market basket in base year) x 100
What is the CPI? What is the inflation rate in relation to this?
CPI = the consumer price index - measures the cost of the market basket of a typical urban family
- most widely used measure of prices in canada
- very important to canadians because the CPI is used to calculate the official estimate of the inflation rate which is used to adjust payments to things like old age security and the canadian pension plan and disability benfits
Inflation rate: the yearly percentage change in a price index such as CPI
inflation rate calculation =
(Price index in year 2 - Price index in year 1) / (Price index in year 1) x 100
What is the PPI?
Producer price index - measures changes in the prices of goods purchased by producers
- contains raw commodities like steel, electricity, coal, etc.
- PPI often responds to inflationary or deflationary pressure more quickly than the CPI - acts as an early warning sign for changes in the inflation rate
