Week 1 - Business and Economics Flashcards
Key Outcome: What is meant by GDP?
The aggregate measure of economic activity.
Formally, the MARKET VALUE of the FINAL goods and services produced in a country in a given period.
Key Outcome: How is GDP calculated?
GDP can be calculated several ways:
What is MARKET VALUE?
The cost of a good on the open market; effectively the price where supply equals demand.
What is meant by FINAL GOODS AND SERVICES?
The resultant product at the end of a process.
Example: Bread
What is meant by INTERMEDIATE GOODS and SERVICES?
Goods or services used up in the production of FINAL goods.
Example: Flour (which is needed to make Bread).
What is meant by OPPORTUNITY COST?
The value of the next best alternative to taking a particular action. The collective value of an item(s) forgone to produce something else.
Electing to produce VIDEOs over HATS; if I want to produce one additional VIDEO but I must forgo 4 HATS to be able to reduce the VIDEO, the OPPORTUNITY COST to produce an additional VIDEO is 4 HATS.
What is meant by COMPARATIVE ADVANTAGE?
Each person is most efficiency, or contributes the greatest, when their OPPORTUNITY COST of production is the LOWEST.
- less is forgone to develop something else.
How do economists deal with Goods or Services utilised over different periods when calculating GDP?
The VALUE ADDED method is used to eliminate issues with considering goods or services across two different periods.
It considers the additional value created by a firm, and mitigates issues around counting costs twice.
What is the definition of VALUE ADDED?
The MARKET VALUE of its product or service MINUS the cost of inputs purchased from different firms.
It represents the portion of value created by each member of the supply chain (intermediates) to create the final good.
What are the three common methods used to calculate GDP?
- Expenditure Method
- Production Method
- Income Method
Are unsold items included within GDP?
Yes - for simplicity economists consider firms purchase their own unsold goods.
What are the FOUR categories considered within the Expenditure GDP calculation?
- Households, C
- Firms, I
- Government, G
- Foreign, NX
What is the definition of CONSUMPTION, C?
Spending by households on goods and services such as food, clothing and entertainment.
It is made up of both DURABLES and NON-DURABLES.
DURABLES?
Long-lived consumer goods; furniture or cards.
NON-DURABLES?
Shorter-lived goods; clothes or food.
Services; haircuts, legal/financial/education services.
What is the definition of INVESTMENT, I?
Spending by FIRMS on FINAL GOODS and SERVICES, primarily capital goods and housing.
What are the 3 sub-categories of INVESTMENT, I?
- Business Fixed Investment: firms purchase new machinery, factories and office buildings.
- Residential Investment: construction of new homes and apartment buildings.
- Inventory Investment: the goods produced by firms that are currently UNSOLD.
What is the NATIONAL INCOME IDENTITY?
Y = C + I + G + NX
It shows how GDP is equal to the sum of C, I, G & NX.
What does the INCOME method of calculating GDP consider?
What is the build up of the two components?
It considers the fact that revenues from the sale of a good or service is distributed to workers or shareholders, and the payments to owners of capital.
Labour income (75%): wages, salaries. Capital income (25%): physical capital (machines & offices), intangible capital (copyrights or patents).
What is REAL GDP?
A measure of GDP in which the quantities produced are valued at the prices in the base year, rather than the current year.
What is NOMINAL GDP?
A measure of GDP in which the quantities produced are valued at current-year prices.
What is UTILITY?
UTILITY measures the value/well-being out of a good.
What is meant by DIMINISHING MARGINAL UTILITY
Diminishing marginal utility highlights that the value of a second good, is not as high as the first.
The more of a commodity consumed the lesser the utility on a per unit basis.
What is the fundamental justification of the DEMAND CURVE?
It reflects the WILLINGNESS TO PAY
What does the SUPPLY CURVE reflect?
The minimum price a firm needs to produce a unit.
What is a FLOW variable?
A variable measured over a unit of time (cash flow STMT)
What is a STOCK variable?
A variable measured in a point in time (balance sheet)
What categories are considered when calculating GDP using the INCOME method?
y = C + S + T
What categories are considered when calculating GDP using the EXPENDITURE method?
Y = C + I + G + NX
NX = X - M
