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Econ 102 - CH 7

Terms in this set (22)

exports
goods and services sold to other countries

ex. wheat and cotton
imports
goods and services purchased from other countries

ex. consumer goods made in china
investment spending
spending on productive physical capital

ex. machinery, construction of buildings
final goods and services
goods and services sold to the final, end user
intermediary goods and services
goods and services that are inputs for production of final goods and services

NOT INCLUDED in the calculation of GDP
why is spending on intermediary goods and services not included in GDP calculation?
Because we would in effect count the sale of steel twice

Steel is sold to the car manufacturer
Car is sold to consumer

Steel would be counted twice

So, we only count the sale of final goods and services produced
Gross Domestic Product (GDP)
the total value of all final goods and services produced in an economy during a given period, usually a year
aggregate spending
the total spending on domestically produced final goods and services in the economy
Expenditure Approach: GDP calculation
the total spending on domestically produced final goods and services in an economy

GDP = C + I + G + NX

C= consumer spending
I= Investment spending = spending by firms
G= government spending
NX= exports minus imports = spending by the Foreign sector

imports are subtracted because income spent on imports is income NOT spent on domestic goods and services
-it's income that leaked across borders

aka imports is spending on foreign goods, not domestically produced goods
Value Added approach: GDP calculation
adding up the total value of all final goods and services produced

add the value of each good in the economy

GDP = Value of outputs - Value of inputs

*don't forget the value added from labor

the value of sales - the value of purchases of intermediary goods
Income Approach: GDP calculation
we add up all the income paid to the factors of production

GDP = Wages + Interest + Rent + Profits

aka the total factor income earned by households from firms in the economy

wages = payment to labor
interest = payment to capital = interest paid to those who lend their savings to firms and the gov't
rent = payment to land = rent earned to those who lease their land to firms
profits = residual; payments to entrepreneur = dividends, profits paid to shareholders
government transfer payments
transfer of money without exchange of good or service

ex. social security pay, unemployment pay
Real GDP
the total value of all final goods and services produced in the economy during the year, calculated using the prices of a selected base year

GDP calculated using the prices of a selected base year
Nominal GDP
GDP calculated using the prices of the current year in which the output was produced
GDP per capita
GDP/population

aka average GDP per person
aggregate price level
a measure of the overall level of prices in the economy
price index
Cost of a market basket in a given year/ Cost of a market basket in BASE YEAR) *100
Inflation rate
Price index in year 2 - Price index in year 1 / Price index in year 1 x100

aka %change in Price Index for consecutive years
GDP deflator
Nominal GDP for that year/Real GDP for that year (scale factor)

usually a whole number ex. 120
Consumer Price Index (CPI)
measures the cost of the market basket of a typical family
Given GDP deflator for each year, which year is most likely our BY?
The year with the GDP at or close to 100
Rate of inflation equation
% Change of GDP deflator between years
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