Chapter 2 Flashcards
1
Q
Define : National income accounts
A
An accounting framework used in measuring current economic activity
2
Q
What are different measurements of economic activity
A
- Product approach
- Income approach
- Expenditure approach
3
Q
Product approach measures economic activity by
A
Adding the market values of goods and services produced, excluding any goods or services used up in the intermediate stages of production
4
Q
Which approach computes economic activity by summing the value added ?
A
Product approach
5
Q
Value added derivation
A
Value of its output - the value of input purchased from other producers
6
Q
Income approach measures Economic activity by
A
Adding all income received by producers of output
7
Q
Expedinture approach measures economic activity by
A
Adding the amount spent by all ultimate users of output
8
Q
Before tax profit
A
Profit with tax included
9
Q
If before tax profit = revenues - wages then total income in an economy equals
(Assuming that there are no other expenses)
A
Total income = wages + before tax profit
10
Q
What is the Broadest, best-known and most often used measure for aggregate economic activity
A
GDP
11
Q
Calculating the gross domestic product using the product approach is defined as
A
The market value of final goods and services newly produced within a nation during a fixed period of time
12
Q
The price at which goods and services are sold is referred as
A
Market value
13
Q
What are the main drawback of using Market value in calculating GDP
A
Excludes Non-market goods and services
14
Q
Examples of non-market goods and services
A
- Homemaking and Child care
- Natural Resources Depletion and Pollution
- Underground economy
- legal activities
- illegal activities
- Services provided by the government
15
Q
Gross Domestic Product
A
The broadest, best-known and most often used measure for aggregate economic activity
16
Q
GDP can be derived by 3 approaches these are
A
- Product approach
- Expedinture approach
- Income approach
17
Q
Define Product approach
A
Its the market value of final goods and services newly produced within a nation during a fixed period of time
18
Q
Final goods and services are ____________
A
End products of a process
19
Q
Intermediate goods and services are
A
Used up in the production of other goods and services in the same period they were themselves produced
20
Q
Example of intermediate goods and services
A
Flour used in producing bread and it’s delivery service
21
Q
Capital goods
A
A capital good is a good that itself produced and is used to produce other goods, but it’s not used up in the same period it is produced in.
22
Q
Inventory
A
Are stocks of unsold finished goods, goods in process and raw materials held by firms.
23
Q
______________ is the amount by which inventory increases (decreases) during the year
A
Inventory investment
24
Q
Which technique automatically excludes intermediate goods form the measure of output
A
Value-added technique
25
Gross National Product is
The market value of final goods and services produced by domestic factors of production during the current period
26
GNP =
GDP + NFP
27
Net Factor payments (NFP)
Income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy
28
Expenditure Approach
Total spending on final goods and services produced within a nation during a specific period of time
29
Income expenditure identity
| What is the formula
Y = C + I + G + NX
30
In the expenditure approach, consumption is
The spending by domestic households on final goods and services including those produced abroad.
31
Consumption of goods can be classified as
1. Durables
(Long lived consumer items)
2. Non durables
(Shorter-lived consumer items)
3. Services
32
In the expenditure approach, Investment includes
Both fixed investment "spending for new capital goods and depreciation" and inventory investment.
33
Fixed investment includes
1. Business fixed investment
2. Residential investment
34
Business fixed investment
Structures, equipment and intellectual property products
35
Residential investment
Construction of new houses and apartment buildings
36
Using the expenditure approach, government purchases of goods and services includes
any expenditure by the government for a currently produced good or service either foreign or domestic
37
Government purchases of goods and services excludes
1. Transfer
2. Interest payments on national debts
38
Government payments for social security is an example of
Transfers
39
Net exports
Exports - Imports
40
Exports are
The goods and services produced within a country that are purchased by foreigners
41
Imports are
The goods and services produced abroad that are purchased by a country's residents
42
Income approach calculates GDP by
Adding up the income provided by producers, including profits and taxes paid to government.
43
Income approach is divided into
1. Compensation of employees
2. Proprietors income
3. Rental income of persons
4. Corporate profits
5. Net interest
6. Taxes on production and imports
7. Business current transfer payments
8. Current surplus of government enterprises
44
Self-employment, is it included in compensation of employees?
False
45
Rental income from assets can be classified into
1. Tangible
2. Intangible
46
Net interests is equal to
Interest received - interest paid
47
Statistical discrepancy is equal
Production measure of output (NNP) - income measure of output (NI)
48
NNP is equal
NI + Statistical discrepancy
49
Statistical discrepancy is positive when
Income measure < production measure
50
Depreciation is
The value of capital wears out during the period over which economic activity is measured.
51
Depreciation is added on what to calculate GNP
NNP
52
Net Factor payments is equal
GNP - GDP
53
Private disposable income is
The income of the private sector
54
Private disposable income measures
The amount of income the private sector is available to spend
55
Private disposable income
Y + NFP + TR + INT -T
( Where TR represents transfers from government and T as direct taxes)
56
Net government income is
The net income of the government sector
57
Net government income is equal to
GNP - Private Disposable Investment
58
Short form of the **Net government income**
Net government income = T- TR -INT
59
**Private disposable income** plus **Net government income**
= Y + NFP = GNP
60
Wealth is equal
Assets - liabilities
61
Wealth measures
The economic well-being of the underlying economic unit
62
National wealth measures
The wealth of an entire nation
63
Rate of saving is an important determinant of
Wealth
64
**Saving** of an economic agent equals
Current income - spending on current needs
65
Saving rate of an economic agent is
Its savings / its income
66
The three measures of saving are
1.Private saving
2.Government saving
3.National saving
67
Private saving is the saving of
The private sector
68
Private saving equals
Private disposable income - consumption
69
The equation of private saving
S(pvt)=(Y+NFP-T+TR+INT)-C
70
Private saving rate is
Private saving / private disposable income
71
Government saving is
Net government income - government purchases of goods and services
72
Government saving equation
S(gvt)=(T-TR-INT)-G
73
Government savings is the same as
Government budget surplus
74
Budget surplus equals
Government receipts - government outlays
75
National saving is
The saving of the economy as a whole
76
National saving equals
Private saving + government saving
77
The equation of national savings
S=S(pvt)+S(gvt)
78
Expanded equation of national saving
S=Y+NFP-C-G
79
National saving equals
Total income of the economy - spending to satisfy current needs
80
Uses of private saving
Private saving is used to fund new capital investment, finance budget deficit and acquire assets from or lend to foreigners
81
The following equation comes from
S=I+(NX+NFP)
S=Y+NFP-C-G ===>
S=(C+I+G+NX)+NFP-C-G
82
Current account balance equals
(NX+NFP)
83
Current account balance is
Payment received from abroad - payment need to foreigners in exchange for goods and services
84
In this equation S=I+(NX+NFP), (NX+NFP) is
Current account balance
85
This equation S=I+CA is for _______
private saving
86
If S=S(pvt)+S(gvt) then S(pvt) equals
S-S(gvt)
87
An expanded equation of S(pvt)=S-S(gvt)
S(pvt)=I+(-S(gvt))+CA
88
-S(gvt) is
Government budget deficit
89
Investment (I) is
Construction and purchase of new capital and inventory investment
90
Government budget deficit is
To cover difference between outlays and receipts
91
Current account balance finance
The difference between borrowing or lending
92
___________ variables are measured per unit of time
Flow
93
___________ Variables are defined at a point in time
Stock
94
Flow variable is the rate of change in a
Stock variable
95
Wealth of a nation is called its
Net worth
96
Wealth is a ______ while saving is a _________
Stock, flow
97
Saving shows
The accumulation of assets or reduction in liabilities
98
Domestic physical assets are
Stock of capital goods and land
99
Net foreign assets are equal to
Foreign asset (owned by domestic residents) - foreign liabilities (domestic assets owned by foreigners)
100
Net foreign assets represent
Claims on foreigners that are not offset by foreigner's claims on domestic economy.
101
Net foreign assets include
Both physical and financial assets
102
Why domestic financial assets held by domestic residents are excluded from national wealth
Since it only involves changing ownership but there is no increase in assets
103
National wealth changes in two ways
1.Changing the value of assets or liabilities
2.Change in the national saving
104
Changes in the value of assets or liabilities can happen of
1.An increase in stock prices
2.Wearing out or depreciation of physical assets
105
Types of variables
1. Nominal variables
2. Real variables
106
Nominal variables are measured in terms of
Current market values
107
Real variables are measured in terms of
Prices of a base year
108
Which type of variable adjust for price changes
Real variables
109
Real GDP is called
constant-dollar GDP
110
Real GDP measures
The physical volume of an economy’s final production using the prices of a base year
111
Nominal GDP “current – dollar GDP” is
the dollar value of an economy’s final output measured at current market prices
112
Chain weighted indexes are sometimes used to measure
Real GDP
113
Growth rate of real GDP computed using chain weighted real GDP is
A sort of average growth rate of real GDP computed using year 1 as the base year and the growth rate computed using year 2 as the base year
114
Which type of average growth rate of real GDP effectively updates base year automatically
Chain-weighting
115
A price index is
A measure of the average level of prices for some specified set of goods and services, relative to the prices in a specified base year
116
The two most known Price Indexes
1. GDP deflator
2. Consumer Price
Index (CPI)
117
GDP Deflator is
a price index that measures the overall level of prices of goods
and services included in the GDP
118
GDP deflator is the amount by which nominal GDP must be
divided or deflated
to obtain real GDP
119
GDP Deflator derivation fromula
100 *(NominalGDP/ RealGDP)
120
If GDP Deflator = 100 * (Nominal GDP ÷ Real GDP) then the RealGDP equals
Nominal GDP ÷ (GDPDeflator / 100)
121
In the base year, real GDP equals
nominal GDP
| since GDP deflator = 100
122
Consumer Price Index (CPI) is
a price index that measures the prices of consumer goods
123
The derivation formula of the CPI equals
(Current Cost of a Basket of Consumer Items ÷ Cost of the Same Basket in the Reference Base Year ) * 100
124
Why does the CPI require the use of a **reference base period**
for comparing prices
over time
125
Why does the CPI require the use of a **expenditure base period**
for determining the
basket of goods used in the index
126
The inflation rate equals
The percentage increase in the price index per period
127
inflation rate derivation formula
((Pt+1 – Pt) / Pt) * 100
128
Which price index is used by policy makers to determine the effect of a certain policy change
CPI
129
Which price index is used to determine the cost of living
CPI
130
Why the CPI can sometimes overstate inflation
| List several reasons why this could happen
1. Fails to adjust to substitution effect
2. Does not reflect price changes in
new technology goods
3. Influenced by uncontrolled
price fluctuations
## Footnote
Substitution effect refers to Changes in the basket of goods and services
131
Core CPI is the CPI after excluding
commodities with volatile prices
132
Core CPI is either measured by
excluding selected items with volatile prices or by statistically ruling out extreme individual price movements
133
Which CPI reflects a more accurate measure for cost of living
| **CPI inflation** or **core inflation**
CPI inflation
134
Interest rate is
a rate of return promised by a borrower to a lender
135
Interest rates is also known as
the rate of return on capital
136
Real interest rate of an asset is
| Define the **real rate of return**
the rate at which the real value or the purchasing power of the asset increases over time
137
Nominal interest rate is
| Define **nominal rate of return**
The rate at which the nominal value of an asset increases overtime
138
Real interest rate derivation formula
Nominal Interest Rate (i) – Inflation (π)
139
The Expected Real Interest Rate is
The nominal interest rate minus the expected rate of inflation
| r = i – (π^e)
