chapter 7 economics – Flashcards
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national income accounting
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measures the economy's overall performance
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aggregate output
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the primary measure of the economy's performance is its annual total output of goods and services.
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gross domestic product
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defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.
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to measure aggregate accurately what has to be done.
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all goods and services produced in a particular year must be counted once and only once.
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to avoid miscounting components GDP includes only _____?
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the market value of final goods and ignores intermediate goods altogether.
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intermediate goods
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products that are purchased for resale or further processing or manufacturing.
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final goods
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products that are purchased by their end users.
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example of intermediate good
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steel beams, crude oil
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example of final good
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gasoline used for personal use, restaurant salads
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why is the value of final goods included in GDP but the value of intermediate goods excluded?
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The value of final goods already includes the value of all the intermediate goods that were used in producing them.
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Including the value of intermediate goods would amount to
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multiple counting
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How much of these amounts should we include in GDP to account for a product.
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The value of the final product.
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value added
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is the market value of a firms output less the value of the inputs the firm has bought from others
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non production transactions are what 2 types of transactions
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purely financial transactions and secondhand sales.
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financial transactions include
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public, private, and stock market transactions.
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public transaction
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social security, welfare, veteran's payments
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private transfer payments
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money parents give children or cash gifts
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stock market transactions
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create nothing in the way of current production and are not included in GDP
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secondhand sales are excluded from GDP why?
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they contribute nothing to current production
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output approach/expenditures approach.
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the sum of all the money spent in buying a product.
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earnings, allocations approach/income approach
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the income derived or created from producing a product.
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expediters approach
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add up all the spending on final goods and services that has taken place throughout the year.
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another word for consumption expenditures by households
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personal consumption expenditures
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personal consumption expenditures
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covers all expenditures by households on goods and services.
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durable goods
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products that have expected lives of three years or more.
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examples of durable goods
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new automobiles, furniture, and refrigerators
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nondurable goods
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products with less than three years of expected life
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non durable goods examples
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food, clothing, gasonline
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services
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work done by lawyers, hair stylist, doctors, mechanics,and other service providers.
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what percentage of personal consumption expenditures are on services
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60
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gross private domestic investment include
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final purchases of tools by business', construction, changes in inventory, money spent on research and development
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owner occupied houses are treated as investment goods why?
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they could be rented to bring in an income return
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increases in inventories are considered to be investment
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they represent unconsumed output.
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capital
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all new output that is not consumed
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gross investment includes
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investment in replacement capital and in added capital
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net private domestic investment includes
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only investment in the form of added capital.
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depreciation
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amount of capital that is used up over the course of a year
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in typical years gross investment _______ depreciation
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exceeds
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when gross investment and depreciation are equal
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net investment is zero and there is no change in the size of the capital stock
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when gross investment is less than depreciation
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net investment is negative
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disinvesting
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using up more capital than it is producing
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government purchases
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government consumption expenditures and gross investment
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government consumption expenditures have 3 components
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goods and services consumed for public services, publicly owned capital(school and highways), R&D and other activities
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symbol (g) represents
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government purchases
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net exports
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(Xn)
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(I)
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private domestic investment spending
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calculation for GDP
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C+Ig+G+X-M
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GDP calculation simplified
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net exports(Xn)=exports(X)-imports(M)
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compensation of employees
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by far the largest share of national income
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interest
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money paid by private businesses to the suppliers of loans used to purchase capital.
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proprietors income
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net income of sole proprietorship, partnerships, and other unincorporated businesses
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corporate profits
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proprietors income flows to the propritetors
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what 3 categories do national income accountants subdivide corporate profits
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corporate income taxes, dividends, undistributed corporate profits
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corporate income taces
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these taxes are levied on corporations' profits. They flow to the government
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dividends
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part of after-tax profits that corporations choose to pay out, or distribute, to their stockholders.
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undistributed corporate profits
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saved or retained tax profits, to be invested later in new plants and equipment
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taxes on production and imports
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includes general sales taxes, excise taxes, business property taxes, license fees, and custom duties
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why do national income accountants add these indirect business taxes to wages, rent, interest, and profits in determining national income?
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to account for expenditures that would are diverted to the government.
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national income
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is the total of all sources of private income plus government revenue from taxes on production and imports.
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consumption of fixed capital
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huge depreciation charge made against private and publicly owned capital each year
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depreciation allowance
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a cost of production and thus included in the gross value of output
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economys stock of private capital expands when net investment is ________?
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positive
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capital stays constant when_____?
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investment is zero
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capital declines when net investment is _____?
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negative
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the measure of net domestic product NDP
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NDP=GDP-(depreciation)
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Personal Income (PI)
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includes all income received, whether earned or unearned.
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Moving national income to personal income
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subtract income earned but not received and add the income that is received but not earned.
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disposable income (DI)
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amount of income that households have left over after paying their personal taxes
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personal taxes include
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personal income taxes, personal property taxes, and inheritance taxes.
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3 domestic sectors of the economy
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households, government, and businesses
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GDP based on prices that prevailed when the output was produced
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unadjusted GDP (nominal GDP)
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(adjusted GDP) real GDP
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GDP that has been deflated or inflated to reflect changes in the price level
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price index
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measure of the price of a market basket in a given year as compared to the price of an identical collection of goods in a reference year.
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market basket
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collection of goods and and services
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base period(base year)
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point of reference of the year.
