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Expenditure Approach to GDP

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Calculating GDP by adding up spending on all final goods and services produced in the nation during the year

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Income Approach to GDP

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Calculating GDP by adding up all earnings from resoruces used to produce output in the nation during the year

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Final Goods and Services

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Goods and services sold to final, or end, users

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Intermediate Goods and Services

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Goods and services purchased by firms for further reprocessing and resale

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Double Counting

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The mistake of including both the value of intermediate products and the value of final products in calculating GDP; counting the same production more than once

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Consumption

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1) Household purchase of final goods and services, except for new residences, which count as an investment 2) Includes services, nondurable and durable goods

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Investment

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1) The purchase of new plants, equipment, buildings, and residences plus net additions to inventories 2) Averages 16% of U.S. GDP 3) Spending on current production not used for current consumption 4) Doesn't include purchase of existing buildings and stocks and bonds, the latter 2 just being an indication of ownership

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Physical Capital

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Manufactured items used to produce goods and services; includes new plants and new equipment

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Residential Construction

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Building new homes or dwelling places

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Inventories

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Producers; stocks of finished and in-process goods

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Gov't Purchases

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1) Spending for goods and services by all levels of gov't; gov't outlays minus transfer payments 2) Averaged 19% of U.S. GDP

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Net Exports. What has been the trade with U.S. net exports

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1) The value of a country's exports minus the value of its imports 2) It's been negative

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Aggregate Expenditure

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Total spending on final goods and services in an economy during a given period, usually a year

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Aggregate Income

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All earnings of resource suppliers in an economy during a given period, usually a year

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Value Added

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1) At each stage of production the selling price of a product minus the cost of intermediate goods purchased from other firms 2) Used when calculating GDP based on the income approach 3) The value added at each stage equals the income earned by those who supply their resources at that stage

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Disposable Income

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1) The income households have available to spend or to save after paying taxes and receiving transfer payments 2) DI= C+S

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Net Taxes (NT)

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Taxes minus transfer payments

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Financial Markets

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Banks and other financial institutions that facilitate the flow of funds from savers to borrowers

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Injection

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Any spending other than by households or any income other than from resource earnings; includes investment, gov't purchases, exports, and transfer payments

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Leakage

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Any diversion of income from the domestic spending stream; includes saving, taxes, and imports

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Underground Economy

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Market transactions that go unreported either because they are illegal or because people involved want to evade taxes

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Depreciation

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The value of capital stock used up to produce GDP or that becomes obsolete during the year

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Net Domestic Product

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GDP- Depreciation

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Nominal GDP

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GDP based on prices prevailing at the time of production

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Base Year

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The year with which other years are compared when constructing an index; the index equals 100 in the base year

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Price Index

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A # that shows the average price of products; change sin a price index over time show changes in the economy's average price level

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Consumer Price Index (CPI)

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A measure of inflation based on the cost of a fixed market basket of goods and services

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GDP Price Index

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A comprehensive inflation measure of all goods and services included in the GDP

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Chain-Weighted System

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An inflation measure that adjusts the weights from year to year in calculating a price index, thereby reducing the bias caused by a fixed-price weighting system

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How was economic prosperity once measured?

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By the stock of precious metals in a national treasury

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How is economic activity described as?

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As an economic flow, a circular flow of output and income through different sectors of the economy

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National Income Accounting System

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Calculations that organizes huge quantities of data that are summarized, assembled into a coherent framework, and reported by the federal gov't

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Would a Japanese plant in the U.S. count toward U.S. GDP? How about a U.S. firm in Japan? Explain why or why not.

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1) Yes 2) No 3) GDP measures all production IN the U.S., regardless of who owns the resrouces

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There are 2 approaches to calculating GDP. What are they?

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1) Expenditure approach 2) Income approach

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National income accounts are based on the simple fact that ________________________.

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One's person's spending is another person's income

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GDP includes only ______ goods and services.

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Final

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Why aren't intermediate goods and services counted in GDP?

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1) Leads to problem of double counting 2) Often intermediate goods can be transformed and then sold for a higher price, so counting the final and intermediate price overestimates the value of the good 3) ^^ additional processing and resale

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Are secondhanded goods counted in GDP? Why?

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1) No 2) They were already counted in GDP when they were produced

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Consumption is the ___________ and averages ________ % of U.S. GDP during this past decade.

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1) Largest spending category 2) 70

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What counts as a durable good?

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Goods that are expected to last at least 3 years

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Do net increase in inventories count as investment? Why or why not?

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1) Yes 2) Represents current production not used for current consumption 3) Help manufacturers cope with unexpected changes in the supply of resources or in the demand for their products

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Equation for Aggregate Demand

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C+I+G+(X-M)

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Double booking entry system

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1) Where spending aggregate output is recorded on one side and income from producing that aggregate output is recorded 2) Spending should = Income 3) These are the 2 ways to calculate GDP

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Another definition for aggregate income and it's relation to aggregate expenditure and GDP.

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1) Sum of all the income earned by resource suppliers in the economy 2) AE=GDP=AI

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The value added at all stages sums to the ___________ of the final good, and the value added for all final goods sums to ______________

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1) Market value 2) GDP based on the income approach

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Draw Circular Flow of Income and Expenditure (pg. 124)

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1) Bottom half is income half, because it focuses on income arising from production 2) Top half is expenditure half: follows C+I+G+(X-M) where aggregate expenditure= market value of aggregate output

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Government outlays

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Transfer payments plus purchases of goods and goods

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G excludes _________________

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Transfer payments

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Discuss the relationship between leakages and injections

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1) Leakages= Injections 2) I+G+X=S+NT+M 3) I+G+X= injections of spending into circular flow 4) S+NT+M= Leakages from the circular flow 5) Demonstrates a second accounting identity based on double-entry bookkeeping

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What is wrong with GDP?

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It doesn't capture/measure a large part of the economy

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Discuss how GDP fails to capture some production

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1) Only includes products sold in markets (market exchange) 2) Ignores the do-it-yourself production (e.g. mothers taking care of children) 3) Ignores off-the-books production (underground economy) 4) fails to capture changes in availability of leisure time and often fails to reflect changes in the quality of products or in the availability of new products

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When measuring GDP, discuss how income must be imputed.

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1) Imputed- assigned a value, because market exchange doesn't occur 2) Does include some economic production that doesn't involve market exchange 3) e.g. wages paid in kind, like employers' payments for employees' medical insurance and food produced by farm families for their own consumption

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What is the difference between GDP and NDP? Discuss gross and net investment.

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1) Net Domestic Production takes into account depreciation while GDP does not 2) Gross investment: Value of all investment during a year 3) Net investment: gross investment minus depreciation

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Discuss Green accounting/green GDP and why it is trying to be developed.

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1) Tries to register impact of production on air pollution, water pollution, soil depletion, and the loss of other natural resources 2) GDP doesn't take into account negative externalities- costs that fall on those not direly involved in the transactions that diminish the quality of life now and in the future

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When computing GDP, the measure of its value is _______________________.

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The market price of output

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Nominal dollars

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Dollar values at the time production occurs

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When GDP is based on nominal dollars, the national income accounts measure the ___________ of __________

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1) nominal value 2) nominal output

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How do you find the price index?

answer

Have a base year, where it is 100. Divide the price you want by the base year times 100 and you get the price index

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The price index in the base period is always _____

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100.

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When measuring inflation based on a fixed market basket of goods, what is not accounted for?

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1) The changes in prices of the individual goods in the basket 2) This causes changes in consumer consumption and ultimately a change in the market basket 3) In reality, every household has a different market basket

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List some problems with CPI

answer

1) Doesn't measure the quality/variety of products, therefore what may be calculated as inflation is actually an increase in quality 2) ^^QUALITY BIAS- assumes quality of market basket remains relatively constant over time and ignores quality improvements, which can overstate the true extent of inflation

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Hedonic Method

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1) Method used to calculate CPI 2) Breaks down an item into characteristics and then estimates the dollar value of each characteristic

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CPI is slow to incorporate _____________ and therefore the CPI calculations _____________

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1) Consumer responses to changes in relative prices 2) Overestimates the true extent of inflation experienced by the typical household

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What are some reasons that the CPI overestimates the true extent of inflation?

answer

1) Doesn't take into account changes in the quality of goods (quality bias) 2) Furthering point 1, doesn't take into account consumer responses to changing relative prices 3) Failed to keep up with consumer shift toward discount stores, like Walmart 4) Only includes an item in the market basket only after the product becomes widely used (and it becomes relatively cheap)

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Why is it a concern that the CPI can overestimate inflation? What is it used for?

answer

1) Determines changes in tax brackets, wage agreements (cost-of-living), Social Security, etc. 2) 30% of federal outlays are tied to changes in CPI 3) Distorts wages that use CPI to adjust for inflation

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How do you calculate the GDP price index?

answer

(Nominal GDP X 100)/ Real GDP

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Nominal GDP reflects growth in _____ and in _____ while chained-dollar GDP reflects growth only in ______

answer

1) real GDP, price level 2) real GDP

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National Income

answer

1) Captures all income earned by American-owned resources, whether located in the U.S. or abroad 2) Equals net domestic product plus net earnings from american resources abroad minus statistical discrepancy

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