Chapter 2 Flashcards
(29 cards)
Gross domestic product (GDP)
key measure of the state of the economy, defined as the market value of the final goods and services produced in an economy over a certain period
Fundamental principle in national income accounting
production = expenditure = income
Production measure of GDP
focusing on the production of products
Expenditure measure of GDP
focusing on the sales and spending of consumers
Income measure of GDP
focuses on adding up all the income earned in the economy
Economic profits
the above-normal returns associated with prices that exceed those that prevail under perfect competition
Important lesson from microeconomics
unless there is some market power by which firms charge prices above marginal cost, economic profits are zero
The Expenditure Approach to GDP
National income identity: Y = C + I + G + NX
Y = GDP in dollars
C = Consumption
I = Investment
G = Government purchases
NX = net exports = exports - imports
Intellectual property products (IPP)
category of investment that includes R&D spending as well as expenditure on durable intangible goods like software, movies, books, and music
Distinction between government purchases and government spending:
Government purchases include expenditures on public schools, highways, government-funded research, and national defense
Government spending includes purchases of goods and services, but also transfer payments and interest payments on any outstanding government debt
Trade balance
common name for net exports
Trade deficit
when the trade balance is negative
important lesson from national income accounting
for every dollar of product sold there is a dollar of income earned
Capital
the inputs into production other than labor that are not completely used up in the production process
the way a firm increases its stock of capital
Investment
Production Approach to GDP
- When GDP is computed as the value of goods and services produced in an economy, there is no double counting
Value added
computed by subtracting the value of intermediate products from the revenue generated by each producer
Limitations of GDP
- GDP includes only goods and services that transact in markets
- Another important omission from GDP is the health of a nation’s people
- GDP doesn’t include changes in environmental resources
Nominal
Word used by economists to refer to a measure like GDP when prices and quantities have not been separated out
Real
Word used by economists to refer to only to the actual quantity of goods and services
Nominal and real GDP are related by this equation
nominal GDP = price level x real GDP
- Nominal GDP can go up either because the price level has gone up or because real GDP has gone up
Laspeyres index
method of computing the change in real GDP with the initial prices
Paasche index
method of computing the change in real GDP with the final prices
Fisher index (chain weighting)
compute the Laspeyres and Paasche indexes, then calculate the average of the 2 growth rate
