Aggregate Output, Prices, and Economic Growth Flashcards
(18 cards)
GDP
GDP is the market value of all final goods and services produced within a country during a given period.
How can GDP is measured?
GDP can be valued by looking at either the total amount spent on goods and services produced in the economy or the income generated in producing those goods and services.
What and what does not count towards the GDP?
GDP counts only final purchases of newly produced goods and services during the current period.
Transfer payments and capital gains are excluded from GDP.
Why are intermidiate goods ecluded form the GDP?
Intermediate goods are excluded from GDP in order to avoid double counting.
How can the GDP be measured? (Methods)
GDP can be measured either from the value of final output or by summing the value added at each stage of the production and distribution process.
The sum of the value added by each stage is equal to the final selling price of the good.
Nominal GDP
Nominal GDP is the value of production using the prices of the current year.
Real GDP measures production using the constant prices of a base year. The GDP deflator equals the ratio of nominal GDP to real GDP.
How do households earn income?
Households earn income in exchange for providing—directly or indirectly through ownership of businesses—the factors of production (labor, capital, and natural resources including land). From this income, they consume, save, and pay net taxes.
Businesses produce most of the economy’s output/income and invest to maintain and expand productive capacity.
Companies retain some earnings but pay out most of their revenue as income to the household sector and as taxes to the government.
How does the goverment collect taxes and what are taxes spend on?
The government sector collects taxes from households and businesses and purchases goods and services, for both consumption and investment, from the private business sector.
What does International trade constist of? Explain International trade?
International trade consists of exports and imports. The difference between the two is net exports. If net exports are positive (negative), then the country spends less (more) than it earns. Net exports are balanced by accumulation of either claims on the rest of the world (net exports > 0) or obligations to the rest of the world (net exports < 0).
What does Capital markets link?
Capital markets provide a link between saving and investment in the economy.
How do you calculate the GDP (Expenditure approcah)?
From the expenditure side, GDP includes personal consumption (C), gross private domestic investment (I), government spending (G), and net exports (X − M).
Expenditure Categories & Subcategories
The major categories of expenditure are often broken down into subcategories. Gross private domestic investment includes both investment in fixed assets (plant and equipment) and the change in inventories. In some countries, government spending on investment is separated from other government spending.
National Income
National income is the income received by all factors of production used in the generation of final output. It equals GDP minus the capital consumption allowance (depreciation) and a statistical discrepancy.
Personal Income
Personal income reflects pre-tax income received by households. It equals national income plus transfers minus undistributed corporate profits, corporate income taxes, and indirect business taxes.
Personal disposable income (Formula)
Personal disposable income equals personal income minus personal taxes.
Provate Savings Formula
Private saving must equal investment plus the fiscal and trade deficits. That is, S = I + (G − T) + (X − M).
Consumption Spending
Consumption spending is a function of disposable income. The marginal propensity to consume represents the fraction of an additional unit of disposable income that is spent.
