Ch.20 The measure of national income Flashcards
(40 cards)
What are the 3 ways of measuring GDP?
- Value Added or “Product” Method
- Expenditure method
- income method
What is one issue of the value added method?
Double or multiple counting
When calculating National income using the production approach, the expenditure approach, and the income approach, what are the 2 components that need to be excluded in order for these method to yearn the same result?
Indirect taxes and depreciation of the capital stock
What is value added in production equal to?
Sales revenue (or total value of output) - cost of intermediate goods = payments owed to firm’s factors of production
Define Intermediate Goods
All G&S used as inputs into further stage of production
What are the four broad categories of Final expenditure method?
- Consumption
- Investment
- Government expenditures
- Net exports
These expenditures are needed to purchase the final output produced in that year.
What is included in the consumption category of the expenditure method?
Household expenditure on all G&S
- Durable goods
- Semi-durable goods
- Non-durable goods
- Services
What do the measure of GDP calculate?
The total value of G&S produced in the economy during a given period.
What is included in the investment category of the expenditure method?
Expenditure on the production of goods not for present consumption
- Plant and Equipment
- Residential structures
- Inventories
- Other
Define Capital Stock
The economy’s total quantity of capital goods
Define Fixed investment
The action of creating new capital goods
How do we calculate the total value at stock inventory?
of unit unsold x market price if I would sell
In what section would residential housing be in and why?
Investment (Y1) - Made for future use/profit.
In future year, if bought, not accounted into revenue (otherwise we double count) - It is only a transfer of value
What is gross investment?
The total investment that occurs in the economy at Year 1.
Net investment = gross investment - depreciation
If 0 = decreasing bc of depreciation
If negative = capital stock decreases
If positive = capital stock increases
What is included in the government purchases category of the expenditure method?
Expenditure on currently (in this year) produced G&S, exclusive of government transfer payments
- Current expenditure (evaluated at cost value bc public goods) : PURCHASES, NOT TRANSFER (e.g., welfare, interest payment, etc)
- Investment
What is included in the net exports category of the expenditure method?
Net exports = exports - imports
- exports of g&s
- imports of g&s (-)
What is the formula to calculate GDP from the expenditure side?
GDP = C + I + G + NX
What does calculating GDP from the input side involve?
adding up all factor incomes and other claims on the value of output until all of that value is accounted for.
What are the two categories of GDP calculation from income side? What are their main components?
- Factor incomes
- wages and salaries
- interest
- business profits - Non-factor payments
- Indirect taxes
- Subsidies
What is included in wages and salaries in the income side method?
Income paid to factors of production (pre-tax)
What is included in interest in the income side method?
Interest earned on
- bank deposit
- loans to firms
- other investment
DOESN’T include interest on bonds from the government (inc. as transfer payment in govn’t expenditure)
What is included in business profits in the income side method?
Dividends (paid to shareholders) and retained earnings (invested in the company for next year)
What is the formula to calculate GDP from income side?
GDP = Factor incomes + Indirect taxes - subsidies + depreciation
Define Depreciation
Loss in value of capital from wearing off
