macro econ 8 – Flashcards
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Total income can be viewed as the sum of
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The total of income payments​ (wages, rents,​ interest, and​ profits) to the owners of resources​ (labor, land,​ capital, and entrepreneurial​ ability) must, because of​ profit's role as a​ residual, be exactly equal to the value of output.
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In the circular flow of income
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Firms supply goods and services that are demanded by households while demanding resources that are owned and supplied by households.
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Gross domestic product​ (GDP):
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The total market value of all final goods and services produced during a year by factors of production located within a​ nation's borders.
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GDP
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used goods do not count
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Gross domestic income​ (GDI):
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The sum of all income— ​wages, interest,​ rent, and profits— paid to the four factors of production.
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Gross private domestic​ investment:
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The creation of capital​ goods, such as factories and​ machines, that can yield production and hence consumption in the future. Also included in this definition are changes in business inventories and repairs made to machines or buildings.
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largest component when using GDP expenditure approach
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consumer​ expenditures; wages
Consumer expenditures make up​ 71% of total expenditures while wages account for​ 59% of total income.
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Suppose social security contributions rise by​ $1 billion while social security benefits also rise by​ $1 billion.​ Further, personal income taxes fall by​ $500 million. As a​ result,
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Disposable income will increase since taxes are lower while both personal income and national income remain unchanged.
disposable income should increase while personal income and national income are unchanged.
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An increase in corporate income taxes would reduce
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personal income
Higher corporate income taxes will reduce the amount of personal income. This is because a larger portion of earned income is no longer being received.
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an increase in social security benefits will make
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personal income larger.
Higher social security benefits will increase the amount of personal income. These increased payments to retirees clearly make received income higher.​ However, since the recipients concurrently produced no goods or​ services, earned income did not change.
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Distinguishing Between Nominal GDP and Real​ GDP:
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Nominal GDP is the value of newly produced output during the current year measured at current market prices. Real GDP adjusts the value of current output into constant dollars by correcting for changes in the overall level of prices from year to year. Real GDP is calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years.
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Real GDP is computed by adjusting nominal GDP for
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changes in the price level
The measurement of GDP after adjustments have been made for changes in the average of prices between years is known real GDP.
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If nominal GDP​ increases, it is possible that
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prices have increased.
output has increased.
both prices and output have increased.
An increase in nominal GDP may be attributed to increases in either or both prices and output.
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When comparing per capita GDP across​ countries, GDP should be adjusted for
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purchasing power parity.
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purchasing power parity.
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Purchasing power parity refers to adjustments in exchange rate conversions that take into account differences in the true cost of living across countries.
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Per capita real GDP equals
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real​ GDP/population.
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The country with the highest per capita GDP based on purchasing power parity​ (U.S. dollars) is
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USA
According to the World​ Bank, the U.S. ranks first in per capita GDP based on purchasing power parity.​ Japan, France, and Germany follow in this order.
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The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called
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purchasing power parity.
The purchasing power parity adjustment to those simple exchange rate conversions is thought to give a much more accurate picture of living standards around the world.
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Total income equals the dollar value of total output because
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spending by one group represents income to the other group.
