Unit 2 Exam Flashcards
GDP equation and definition
C + I + G + Xn(Exports - imports) C = Consumption I = Investments G = Government Expenditures X = Exports minus Imports
Why do we need to measure and understand GDP?
GDP is a measurement that indicates the health of your economy.
What is excluded from GDP?
1.)intermediate goods - an intermediate good has not yet reached its final user, but rather is an input in the production of another good.
Ex: When krispy kreme buys flour for their donuts it doesnt count for GDP until they sell the donut to the customer purchases the donuts because only then is it in its final stage.
2.)used goods - used goods were included in GDP when they were first produced, they are not included in GDP when they are exchanged as used goods, because no new production takes place.
3.) Financial transactions - money gifts, loans, and purchases of stocks and bonds are examples of financial transactions where money changes hands but no new production takes place.
4.)Government transfer payments - Transfer payments are transfers of income from the gov’t to households or businesses, not in exchange for goods, services, or resources. No new production takes place.
5.)nonmarket production - in non market production new production is taking place but this is no market transaction to reveal an objective market value for the production.
Ex: do it yourself jobs
6.) underground production - this is unreported production. Production may be unreported because it is illegal (ex: the output of a meth lab) or because the producer is evading taxation. ( ex: unreported cash income)
Ex: drugs, gambling, prostitution, lawn service, maid service.
Three macroeconomic goals for society?
- ) price level stability
- )full employment
- )economic growth
- A nations success in achieving these goals is measured by its inflation rate, and Real GDP growth rate.
US GDP relates to the rest of the world?
The US is a high per capita GDP country but there is a significant variation in the standard of living in the different states.
Consumption is the driver of GDP in America - in China the driver is exports.
Per Capita GDP = GDP/Population
When comparing different economies, per capita output numbers may be more informative than total output numbers. (per capita means per person)
What is consumption?
Household consumption of goods and services is the largest component of GDP. In 2010, consumption made up about 70% of GDP
Ex: groceries, hair, nails, boats, etc.
Consumption is the using up of a resource
What is investment? 3 things.
Investment is the acquisition of new physical capital
- ) new capital goods
- ) changes in business inventory
- ) new residential housing
What does G stand for? What does it include? What does it exclude? Why?
G = Government
- Includes federal, state, and local governments on goods and services. but does not include transfer payments. The market value of government purchases is usually detrmined by the amount of the governments expenditures, since government production is usually not sold in the market place.
Ex: bridges and roads
What is Xn? What are imports and exports?
Xn = (Exports - Imports) In America we have more exports so this is a negative number when we calculate GDP.
Exports - Foreign purchases of domestic goods
Imports - Domestic purchases of foreign goods
Nominal GDP, inflation, real GDP?
Nominal GDP is GDP.
Inflation is change in price levels
Real GDP - is nominal GDP -(minus) inflation *Real GDP measures true growth.
Why compute real GDP?
It measures true economic growth.
GDP, depreciation, Net Domestic Product (NDP)
GDP - (minus) depreciation = Net Domestic Product
Net Domestic Product(NDP = GDP less
capital consumption allowance
Why do we want to factor out depreciation?
Depreciation allowances - would be paid in taxes but instead you deduct the depreciation from your taxes.
Actual* The tax deductible funds have been set aside to replace worn out or obsolete plant and equipment.
Why??? It makes people want to invest in new.
Define Gross investment and Net Investment
Gross investment - It is the total amount we invest in new capital. Net Investment - It is the additional plant and equipment we end up with at the year end.
Why s consumption so important to GDP?
It is the driver of GDP in the U.S.
What is Consumption Function?
Consumption Function is the curve showing the relationship between disposable income and consumption.
Also - As income rises consumption rises but not as quickly. - If your income keeps rising @ an increasing rate it is hard to spend all that money.
What is saving?
Saving is simply not spending.
Define Autonomous consumption and induced consumption.
Autonomous consumption - even when disposable income is zero we still have consumption. Ex: toilet paper, food, and bread
Induced Consumption - Consumption that varies with income.
Determinants of the level of consumption.
1) disposable income - spend more or less based on income.
2)credit availability - if you don’t have the money you whip out the
plastic and consume.
3)Stock of liquid Assets in Consumers - Things that can be turned
to cash quickly - silver, gold, heirlooms, jewelry…
4) Stock of durable goods - washers, dryers, cars…
5) Keeping up with the Joneses - social determinant - I saw it and
I want it!!
6) Consumer expectations - If price is going to increase then you
will buy it now if its going to decrease then you will wait
***Ebay has increased the ability for many assets to be liquid.
Define Permanent Income Hypothesis
It is a theory of consumption that was developed by Milton Friedman. In its simplest form, the hypothesis states that the choices made by consumers regarding their consumption patterns are largely determined by a change in permanent income, rather than a change in temporary income.
Business/ Investment
This is the I in the GDP equation. Investment does not react as quickly as consumption.
Define Investment
Investment is the acquisition of new physical capital it consists of;
1) new capital goods
2)changes in business inventories
3) new residential housing
EX: any new plant/factory equipment, office buildings, retail/shopping centers, computer software, residential housing, additional inventory.
3 types of businesses
proprietership - go into business for yourself
partnership - two or more people
corporation - limited liability, pay corp. income tax can sell stock to raise money
Define stockholders
owners of a corporation
bondholders
creditors of a corporation
Define corporate capitalization
the process of converting retained earnings into capital by issuing new stock.
How do stocks and bonds relate to GDP?
Stocks and bonds not calculated in GDP but give the company money to immediately spend it on whatever they want.
Calculating Inventory
Business inventories only matter year to year not month to month.
How does savings get invested?
Through retained earnings and depreciation allowances.
Corporations investment - define retained earnings and depreciation allowances.
Retained Earnings - portion of the profits that are not paid out to owners.
Depreciation Allowances - Would be paid in taxes but instead you deduct the depreciation from your taxes.
**Actual - The tax deductible funds that have been set aside to replace wornout or obsolete plant and equipment.
$$$ The outcome is that people want to invest in new.
Formula for Net Investment??
Gross investment - depreciation = Net Investment
Why do firms invest?
1) Their sales outlook is good
2)Their capacity utilization rate is high - meaning large output. If
production is @ its highest with lowest amount of resources
used.
3) Interest rates are low.
4) Expected rate of profit is high.
How has the economic role of government changed?
Economic role of gov’t has changed significantly - it has increased in the last 100 years.
4 main government economic influences
1) spends trillions
2) levels trillions in taxes
3) redistributes billions
4) regulates
4 Economic roles of government
1) Provision of public goods and services.
Ex: airports, defense, sewers, and highways
2) Redistribution of wealth - Ex: welfare and health care = money
taken away from some and given to others.
3) Stabilization - Ex: low unemployment, stable price, stimulus
4) Economic Regulation - Ex: Child labor laws, environment
(environmental protection) competition, and court system.
Define aspects of Federal Government Revenue and Spending
1) Great society programs - or entitlement programs, medicare,
medicaid, food stamps.
2) We spend as much in defense as the rest of the world
combined.
3) Interest on debt is the fastest growing area. $$ US is paying
interest on 16 TRILLION!!
Defense Spending - what is significant about ours?
We spent as much as the rest of the world combined in defense.
State and local government spending?
1) education
2) health and welfare
3) police and fire - growing expense, fast/highly growing.
How do transfer payments relate to GDP?
They are transfers of income from the government to households or businesses, not in exchange for goods, services, or resources. Since no new production takes place, transfer payments are excluded from GDP.
Direct Taxes - Define and give example
Direct taxes - are taxes with your name on it Ex: personal income tax, social security, and property tax.
Define Indirect taxes and give example
Indirect taxes - are taxes not on people but on goods, sales tax, excise tax(such as cigarette tax)
Progressive taxes
Progressive taxes impose higher tax rates on higher levels of income - fall on those best able to pay and they provide little to no burden on the poor. Ex: Federal personal income tax.
Define Proportional Taxes
Proportional taxes impose the same tax rate on all levels of income - its equal it places equal burden on rich. Middle class, and poor.
Ex: Property tax is the best example we have of this and its only because it plays out that way but other than property tax there are none. We pay the same tax on our groceries, beer, and cigarettes as Anjelina Jolie.
Regressive Taxes - define
Regressive taxes impose higher tax rates on lower levels of income.
Ex: The amount of taxes I pay out equals 30% of my income and Anjelina Jolie pays out 10% of her income in taxes.
Define payroll taxes
social security and medicare your employer matches
define excise tax
specific goods that are taxed Ex: gas, liquor, cigarettes
Sources of state and local revenue? 3.
1) personal income
2) sales tax
3) property tax
