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principle measure of national economic perf
US GDP=total mkt value of all final goods/servc produced w/in U.S. by domestic or foreign sources during a specified pd


Expenditures approach

sum of all expenditures in the economiy
C-consumer spending
i- Investment spending
G-Govt spending
NX-Net exports


Consumer Spending

largest component, most important determinant is personal incomes
changes in incomes don't affect GDP $for$
for every adtl $ consumers receive in income, some spent, other put in savings


Investment Spending

Business investments- create jobs and income (PPE purch); all construction (rent/lease); inventory changes
business invest most volatile b/c reflect optimism about future demand and affected by wide and sudden variations
invest demand is inversely related to real interest rate in mkt. determine to invest or deposit, compare real rate and expected rate; lower interest rate means invest more


Government Spending

total outlays for goods and svcs consumed by govt in providing public svcs and long lived public infrastructure (schools, bridges)
-transfer pmts (SS) not included b/c will be spent on final goods


Net Exports

attempt to capture $ spent on US-made goods and exclusdes American spending on goods and svcs made abroad
NX=Exports (X)- Imports (M)
can be positive or negative


National Income

National income- all income generated by US owned, no matter location (largest component is employee compensation)
Proprietor/ptnrshp income
Corp profits



measures income generated in US regardless of owner
additions to NI
-indirect business taxes (sales, excise)
-net foreign factor income- excess of income generated in US from foreign owned resources over income from other countries from US owned
NDP = GDP- capital consumption allowance (depreciation)



Add to NDP the allowance for amnt of capital stock consumed/lost in process of income generation


Personal and Disposable income

PI- all income rec'd by indiv; total of NI minus taxes SS, income tax, etc.
DI- income of indiv after taxes; composed of consumption/interest pmt and savings


Limitations of GDP

only includes finished goods, doesn't include intermediate goods (dbl counting)
increases in GDP don't consider environmental factors (noise, congestion, pollution)
benefit of economic activity from disasters included; not included is loss
underground econ in 3rd world not included
value of leisure time not included


Nominal vs Real GDP

Nominal- basic GDP calc w/ adding total mkt value of all final goods/svcs in current $ (not good to compare diff yrs of output since price level fluctuates)

Real-facilitate yr to yr comparison, adjust nominal for changes in general price level to report in constant $
Real GDP= Nominal/Price index (in hundredths)
if real GDP rises faster than pop country has rising std of living


Business Cycle

tendency toward instability w/in overall growth of capitalistic economies
peak- @/near full employment; @/near max output for current level of resources/tech
recession- GDP falls, unemployment rises; if severe prices fall and is a depression
trough- econ activity reaches lowest ebb
recovery- output and employment rise, price level rises


Causes of recessions/troughs

consumer confidence declines (pessimistic about future, spend less); unsold inventory builds, businesses decrease production and fire ppl

miscalculation in fiscal or monetary policy by govt


Leading Economic indicators
changes suggest future change in real GDP in same direction

-avg workweek for mfg
-new orders for consumer goods and nondefense capital goods
-bldg permits for houses
-stock prices
-money supply
-spread between ST and LT interest rates
-consumer expectations


Leading Economic indicators
changes suggest future change in real GDP in opposite direction

initial claims for unemployment insurance (more ppl not working = slow business activity)
vendor perf (vendors have slack time and carry high level of inventory)


Aggregate demand

schedule reflecting all goods/svcs consumers willing/able to buy at diff price levels
curve reflects relationship between price level and real GDP
downward sloping; no distinction between ST and LT


Aggregate supply

schedule reflecting all goods/svcs able to produce at various price levels
ST-changes in price level makes firs adjust output to earn excess profits; unused capacity available (workers work for hourly wage) represented by leftmost portion of curve; curve rise as inputs added
LT-vertical line, full employment, change in price=change in wages, no change in real profits


factors shift aggregate supply curve

change in productivity, measured by worker productivity (total real GDP produced during year divided by total # hours worked). more produce in an hour=more productive



amnt of capital- more invested in plant & machinery, higher productivity (more automation)
state of tech- more advanced, more productive (shift AS curve right); adtl income from tech shifts AD curve right)
workforce competence-more educated/trained, higher



increase in price level depends on degree that AD increases wrt AS; change in price level (inflation) causes worry when economy expands
demand doesn't change, right shift of AS results in lowering of price level (deflation)


Factors in economic growth

supply- increased productivity, increase in quantity/quality of natural resources
demand-increase in total spending
efficiency- efficient allocation of resources


Demand side policies

actors in free market aren't only parties to determine AD
-govt can stimulate/suppress
-stimulative- encourage economy


Supply side

policies implemented to increase country's stock of investment capital; use cap to increase capacity which stimulates AS



sustained increase in the general level of prices
reported rate of inflation is avg of increase across all
prices in the economy
rate of inflation=(current yr price index- prior yr price index)/prior yr price index
price index- measure of price of mkt basket of goods/svcs in 1 yr compared w/ price in a base year


money's purchasing power

how many goods/svcs able to acquire in exchange for` it



CPI=cost of market basket in current year/cost of mkt basket in base yr
monthly computation by Bureau of Labor Statistics
can lower business' buying pwr, challenge in maintaining margins
compare amnts in constant $, both deflated using PI, difference divided by prior pd's amnt

measures change in general price eve by pricing items in a typical urban household shopping list; uses 87 urban areas in US from 23k retail/svcs; rent data from 50k landlords/tenants


Constant dollar calculation
this year=$1080; CPI=115
last year=$950; CPI=107

difference nominal dollars=1080-950=130
constant dollars this year billing=1080/1.15=939.130
constant dollars last year billing=950/1.07=887.85
difference in constant dollars=51.28
nominal billings increases 13.7%
after inflation adjustment increased 5.8% (51.28/887.850)


Nominal vs real income

nominal- $ rec'd as wages, interest, rent, profits
real- purchasing power of income rec'd; relates directly to std of living; shrinks when nominal income doesn't keep pace w/ inflation


Effects of inflation on financial reporting

inventory (LIFO)
-rapid rising prices, increases COGS, decreases op income, decrease tax liaab
-if use FIFO, COGS=older less costly inventory, boosts op income

depreciation (asset recorded at cost)
-rising prices, amnts reported as depreciation expense are lower than would be if in terms of replacement cost; op income higher in current pd, but replacing assets as retired is more $$$