Chapter 4 Flashcards
Injections and leakages
When you look at the circular flow model more closely, you find that there are things that inject money into the economy and other things that leak out of the economy. Injections into the economy include investment, government purchases and exports while leakages include savings (like putting money in a savings account), taxes and imports.
Income approach to GDP
Calculating GDP by summing all wages, rent, interest and profits received for factors of production.
This can be represented by the formula GDP = TNI + T + D + NFFI.
Total national income (TNI) is the sum of all wages, rent, interest, and profits in given country.
Sales taxes (T) collected by governments.
Depreciation (D) is the loss in value of capital over time such as machinery, buildings etc,.
Net foreign factor income (NFFI)=Income earned by citizens of a country working outside the country - income produced by foreign workers resident in the given country
Expenditure Approach
GDP=C+I+G+NX
C=Consumer spending
I=business purchases of capital (like equipment and buildings), R&D spending, purchases of newly built houses in a given year, Changes in business inventories
G=Government purchases like paying salaries of civil servants and buying military equipment
NX=Exports - Imports
GDP criticisms
Doesn’t account for income inequality when measuring overall well-being in a country and other factors for well-being like environmental quality in a country.
Doesn’t measure informal economic activity, which many in developing countries rely on to survive.
Doesn’t count Business-to-business transactions.
Another limitation of GDP is that it only measures the value of goods and services produced within a country’s borders and does not consider the cross-border activity. This can lead to problems when comparing GDP between countries. For example, a country with a large number of tourists may have a higher GDP than a country with a similar population, but fewer tourists. Also, maybe remittances.
Intermediate good
Good acquired to produce a final good.
Ex: A microchip used to produce a computer.
Things not included in GDP
Illegal goods or services
Unpaid services
Transfer payments
Intermediate goods produced and sold in a given year
Used goods sold in a given year
How do savings, investment and economic growth correlate?
Money saved in the bank allows banks to make loans to business for investments which expand the capability to produce more goods and services, expanding economic growth.
What happens to GDP calculations when inventory is sold?
In the year that it is sold (assuming it was bought in a different year by the acquirer), consumption goes up, but business inventories within investment declines in the GDP calculations for that same year.
National income accounting
Methods by which GDP is calculated
