Chapter 7: Taking the Nation's Economic Pulse

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Gross domestic product (GDP)

The market value of all final goods and services produced within a country during a specific period.

Intermediate goods

Goods purchased for resale or for use in producing another good or service.

Final market goods and services

Goods and services purchased by their ultimate user.

Personal consumption

Household spending on consumer goods and services during the current period. Consumption is a flow concept.

Private investment

The flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future.

Depreciation

The estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.

Inventory investment

Changes in the stock of unsold goods and raw materials held during a period.

Net exports

Exports minus imports. Net exports = Total exports - Total imports

Exports

Goods and services produced domestically but sold to foreigners.

Imports

Goods and services produced by foreigners but purchased by domestic consumers, businesses, and governments.

Indirect business taxes

Taxes that increase a business firm's costs of production and, therefore, the prices charged to consumers. Examples are sales, excise, and property taxes.

National income

The total income earned by a country's nationals (citizens) during a period. It is the sum of employee compensation, self-employment income, rents, interest, and corporate profits.

Gross national product (GNP)

The total market value if all final goods and services produced by the citizens of a country. It is equal to GDP minus the net income of foreigners.

Net income of foreigners

The income that foreigners earn by contributing labor and capital resources to the production of goods within the borders of a country minus the income the nationals of the country earn abroad.

Nominal values

Values expressed in current dollars.

Real values

Values that have been adjusted for the effects of inflation.

Consumer price index (CPI)

An indicator of the general level of prices. It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.

GDP deflator

A price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year (currently 2000). Unlike the consumer price index (CPI), the GDP deflator also measures the prices of capital goods and services purchased by businesses and governments. Because of this, it is thought to be a more accurate measure of changes in the general level of prices than the CPI.

Inflation

An increase in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines when inflation is present. Inflation rate = (This year's PI - Last year's PI / Last year's PI) x 100

Nominal GDP

GDP expressed at current prices. It is often called money GDP.

Real GDP

GDP adjusted for changes in the price level. Real GDP current yr = Nominal GDP current yr X (GDP deflator base yr / GDP deflator base yr)

Underground economy

Unreported barter and cash transactions that take place outside the recorded market channels. Some are otherwise legal activities undertaken to evade taxes. Others involve illegal activities, such as trafficking drugs and prostitution.

Only final goods and services count

Sales at intermediate stages of production are not counted by GDP because the value of the intermediate goods is embodied within the final-user good.

Dollars are the common denominator for GDP

Each good produced increases output by the amount the purchaser pays for the good. The total spending on all goods and services produced during the year is then summed, in dollar terms, to obtain the annual GDP.

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