Flashcards in Chapter Five Deck (21):
Gross domestic product or GDP is the market value of all the final goods and services produced within a country in a given time period. Value produced: use market prices to value production.
What produced: final good or service is a good or service that is produced for its final user and not as a component of another good or service. Intermediate good or service: is a good or service that is produced by one firm, bought by another firm and used as a component of a final good or service. GDP included only those items that are traded in markets.
Where produced: within a country
When produced: during a given time period
Explain what makes up GDP
Consumption expenditure C: is the expenditure by households on consumption goods and services.
Investment I: is the purchase of new capital goods ( tools, instruments and machines etc) and additions to inventories.
Government expenditure on goods and services G: is the expenditure by all levels of government on goods and services.
Net exports of goods and services NX: is the value of the exports of goods and services minus the value of imports of goods and service.
Exports of goods and services X: are the items that firms in the U.S. Produce and sell to rest of the world
Imports of goods and services: are the items that households, firms and governments in the U.S. Buy from the rest of the world.
Total expenditure is the total amount received by producers of final goods and services
total expenditure = C+ I + G + NX
Explain expenditure equals income
Income/ labour earns wages, capital earns interest, land earns rent, entrepreneurship earns profits. Households receive these incomes.
Expenditure equals income: because firms pay out everything they recieve as incomes to the factors of production Y, total expenditure equals total income. That is the GDP formula. The value of production equals income equals expenditure
What is the expenditure approach
Measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services and net exports.
What expenditures are not in GDP
Used goods: expenditure on used goods is not part of GDP because these goods were part of GDP in the period in which they were produced and during which time they were new goods.
Financial assets: when households buy financial assets such a bonds and stocks, they are making loans not buying goods and services.
What is the income approach
Measures GDP by summing the incomes yay firms pay households for the factors of production they hire. The Australian national income, expenditure, and product accounts divide incomes into three big categories; wage income, company profits and imputed rent and mixed income.
Explain wage income
Wage income called compensation of employees in the national accounts is the payment for labour services. It includes net wages, salaries plus fringe benefits paid by employers such as health care insurance, social security contributions and pension fund contributions
Explain profits and imputed rent
Company profits, called gross operating surplus in the national account is the sum of the incomes earned by capital, land and entrepreneurship. Imputed rent is the rent that homeowners implicitly pay to rent the housing they own and use themselves. By including this time in the national accounts the total value of housing services whether they are owned or rented is measured.
Explain mixed income
Mixed incomes are the wages, interest, rent and profit earned by people who run their own businesses.
Explain gross domestic income at factor cost
Is not GDP. We need to make to make two adjustments to arrive at GDP: one from factor cost to market prices and one for a statistical discrepancy
From factor cost to market price: the expenditure approach vales goods at market prices; the income approach values them at factor cost. Indirect taxes (such as sales taxes) make market prices exceed factor cost. Subsidies (payments by gov to firms) make factor cost exceed to market prices. To convert the value at factor cost to the values at market prices we must add indirect taxes and subs tract subsidies.
Statistical discrepancy: the income approach and the expenditure approach do not deliver exactly the same estimate of GDP - there is a statistical discrepancy. Statistical discrepancy is the discrepancy between the expenditure approach and the income approach estimated of GDP, calculated as the GDP expenditure total minus the GDP income total.
What is GDP and related measures of production and income
Gross national product or GNP is the market value of all final goods and services produced anywhere in the world in a given time period by the factors of production supplied by residents of the country. Australian GNP= Australian GDP + net factor income from abroad.
Explain how to get from gross product to net product
The income approach included gross profits and the expenditure approach includes gross investment. Net domestic product equals GDP minus depreciation. Depreciation is the decrease in the value of capital that results from its use and from obsolescence. Net national product equals GDP minus depreciations
Explain disposable income
Consumption expenditure is one of the largest components of aggregate expenditure and one of the main influences on its is disposable personal income. Disposable income is the income received by households minus personal income taxes paid.
Explain real GDP and nominal GDP
Real GDP is the value of the final goods and services produced in a given year expressed in the prices of the base years.
Nominal GDP: is the value of the final goods and services produced in a given year expressed in the prices of that same year. The method of calculating real GDP changed in recent years. Here we describe the essence o the calculation. The appendix gives the technical details.
How to calculate real GDP
The goal of calculating real GDP is to measure the extent to which total production has increased. Real GDP removed the influence of price changes from the nominal GDP numbers.
What are the uses and limitations of real GDP
We use estimates of real GDP for three main purposes: to compare the standard of living over time, to track the course of the business cycle and to compare the standard of living among countries.
Explain the standard of living over time
To compare living standards we calculate real GDP per person - real GDP and then divide by the population
The growth of potential GDP per person and fluctuations of real GDP per person around potential GDP can change standard of living
Explain potential GDP
Is the value of real GDP when all the economy's factors of production - labour, capital, land and entrepreneurial ability - are fully employed. When some factors of production are unemployed, real GDP is less than potential GDP. When some factors of production are over employed and working hard , real GDP exceeds potential GDP. In the short term, real GDP fluctuates around potential GDP. To measure the trend in the standard of living. We remove the influence of short term fluctuations and focus on potential GDP.
Explain tracking the course of the business cycle
Fluctuations in the pace of expansion of real GDP is called the business cycle. The business cycle is a periodic buy irregular up and down movement of total production and other measures of economic activity. The four stages of a business cycle are expansion, peak, recession and trough.
Explain standard of living one countries
To compare living standards across countries, we must convert real GDP into a common currency an common set of prices called purchasing power parity.
What goods and services are omitted from GDP
Household protection: real GDP omits households production and it underestimates the value of the production of many people most of them women
Underground protection: economic activity hidden from governments to avoid taxes and regulations or production that is illegal. Because underground economic activity is unreported, it is omitted from GDP.
Leisure time: our Woking time is valued as part of GDP, but our leisure time is not.
Environment quality: pollution is not subtracted from GDP. We do not count the deteriorating atmosphere as a negative part of GDP. If our standard of living is adversely affected by pollution, our GDP measure does not show this fact