11: measuring nation's income Flashcards

1
Q

Microeconomics

A

Study of how households and firms
* make decisions
* interact in markets

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2
Q

Macroeconomics

A

Study of economy-wide phenomena
* Including inflation, unemployment, and economic growth

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3
Q

Gross Domestic Product (GDP)

A
  • Measures total income of everyone in the economy.
  • Also measures total expenditure on the economy’s output of
    goods and services.
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4
Q

Income equals expenditure

A
  • For the economy as a whole
  • Because every dollar a buyer spends is a dollar of income for the
    seller.
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5
Q

The Circular-Flow Diagram

A
  • Simple depiction of the macroeconomy
  • Illustrates GDP as spending, revenue, factor payments, and
    income
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6
Q

Households:

A

 own the factors of production,
sell/rent them to firms for income
 buy and consume goods & services

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7
Q

Firms

A

 buy/hire factors of production,
use them to produce goods
and services
 sell goods & services

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8
Q

The government

A
  • Collects taxes, buys goods and services
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9
Q

The financial system

A
  • Matches savers’ supply of funds with borrowers’ demand for loans
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10
Q

The foreign sector

A
  • Trades goods and services, financial assets, and currencies with
    the country’s residents
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11
Q

Four components of GDP

A
  • Consumption (C)
  • Investment (I)
  • Government Purchases (G)
  • Net Exports (NX)
  • These components add up to GDP (denoted Y):
    Y = C + I + G + NX
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12
Q

CONSUMPTION (C)

A

Total spending by households on goods and services
* For renters, C includes rent payments.
* Not included in C: purchases of new housing

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13
Q

Investment, I

A

Total spending on goods that will be used in the future to produce more goods
* Business capital: business structures, equipment, and
intellectual property products
* Residential capital: landlord’s apartment building; a
homeowner’s personal residence
* Inventory accumulations: goods produced but not yet sold

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14
Q

Government purchases (G)

A

All spending on the goods and services purchased by the
government
* At the federal, state, and local levels.

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15
Q

NET EXPORTS (NX)

A
  • Net exports, NX = exports – imports
  • Exports: foreign spending on the economy’s goods and services
  • Imports: are the portions of C, I, and G that are spent on goods and services produced abroad
  • Adding up all the components of GDP gives:
    Y = C + I + G + NX
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16
Q

Nominal GDP

A
  • Values output using current prices
  • Not corrected for inflation
17
Q

Real GDP

A
  • Values output using the prices of a base year
  • Is corrected for inflation
18
Q

GDP deflator

A
  • A measure of the overall level of prices.
    =100×(nominal GDP)/(real GDP)
19
Q

Economy’s inflation rate

A

Compute the percentage increase in the GDP deflator from one year to the next

20
Q

Real GDP per capita

A

Main indicator of the average person’s standard of living
* But GDP is not a perfect measure of well-being.
* Robert Kennedy issued a very eloquent
yet harsh criticism of GDP:

21
Q

GDP DOES NOT VALUE:

  • The quality of the environment
  • Leisure time
  • Non-market activity, such as the child care
    a parent provides at home
  • An equitable distribution of income
A
22
Q

THEN WHY DO WE CARE ABOUT GDP?

  • Having a large GDP enables a country to afford
  • Better schools, a cleaner environment,
    health care, etc.
A
23
Q
A
24
Q
A
24
Q
A