Terms in this set (65)
GDP= C +IG +G +Xn
GDP= consumption + gross investment + government spending +exports-imports.
What is GDP
The monetary value of all final goods and services produced by a country in one year.
Sum of expenditures of all goods produced (or income earned) within a nation's border in one year.
Which is the largest component of GDP and which is the smallest?
is the largest component of GDP
is the smallest.
What helps determine is a country is rich
technology, property rights, markets.
NDP(Net Domestic Product)
(replacement capital/consumption of fixed capital/value of loss capital
NI (national income)
(net foreign factor income earned in US)
-indirect business taxes
=NI(national income-how much are Americans earning worldwide-gross national product)
undistributed corporate profits-corporate income taxes-social security and TP
Personal income-personal income taxes
(DI is what you can spend/save and pay in taxes)
GNP (gross national product) ownership
All goods and services produced legally for pay by citizens of a country in 1 yr. (
mattered not geography)
All goods and services produced legally for pay in a
border in 1 yr
(Geography matters, not citizenship)
GDP expenditures approach
GDP=(66%) + IG(18%) + G(17%) + Xn (-1%)
Xn is negative because we
import more than we export
-not counted in production involved
-opposite of a tax.
Government transfers money to an individual
. Subsidy welfare compensation
What is included in a nation's gross domestic product?
the four components to a nation's gross domestic product are
(what households buy),
gross investment spending
(what businesses buy,)
(what government buys) and
net export spending
(what we export minus what we import.)
Personal consumption expenditure
-food(non durable goods 29%) don't last a long time
-appliances-more than 3 yrs durable Durable goods (12%) long term
Everything else is a service
(car wash, insurance, electricity, transportation going to doctor, getting a haircut) consumer expenditures for services(59%)
There are three components to gross investment:
(tools, machinery, plants, capital goods, intellectual property, research, and development)
Residential fixed investment
(construction of new housing..can rent for financial return and apartments)
Adjustment to inventories
(accounts for unsold goods in the current year)... a net increase in inventories is positive, a net decrease in inventories is negative)
Investment or disinvestment represents the sale of output produced in a given year.
What makes up the private sector?
C(consumption) and Ig(gross investment)
Government purchases (G)
State, local and federal
G purchases of goods and services produced (not transfer payments)
Subcategories of government
-50 state gov
89,000 local gov(60% for state and local )
You can add up a nation's overall income to get GDP too. GDP is equal to the sum of wages and salaries, rents, interest income, profits, indirect business taxes, depreciation of capital, and net foreign factor income
is output that has been adjusted to hold the
price level constant.
This way we can measure the level of goods and services that are produced over a period of time without worrying about changes in prices
Real GDP measures all of a nation's output, which makes it one of the most important measurements of economic growth over time. However, an increase in nominal GDP could mean that
prices and output have increased
nominal GDP is NOT the best measurement of growth
Real GDP per capita
is another great way to measure economic growth and a nation's general economic well being.
-It represents the output per person within an economy. We use this measure to
determine whether a nation's standard of living is increasing or decreasing
What is the formula for Real GDP
nominal GDP/GDP price index
Name 8 things excluded from a nation's GDP
1. Financial transactions (stocks and bonds)
2. Transfer payments(social security checks)
3. Used goods (secondhand golf clubs)
4. Non-market transactions (cleaning your room)
5. Illegal transactions (bootlegging)
6. Unreported transactions (tips you do not report to the government)
7. Intermediate goods (fabric in net)
8. Goods produced in other countries (your cellphone made in China)
has not been adjusted for changes in the price level and
reflects the market value of all goods and services in the year
shortcomings of GDP
1.non-market transactions do not count (leisure is not factored in)
2.Improved product quality
3.underground economy not counted
4.GDP impact on environment (spill over costs)
5.Does not reflect/account for income distribution
(wealthy country can have the most poverty)
An increase in Real GDP per capita
-(Real GDP/population=real GDP per capital)
-growth is a goal(it lessons the burden of scarcity)
Arithmetic of growth
Rule of 70 (70/10%=7 years)
main sources of growth
increase in resources, productivity (health, training, education, and motivation improvements)
What does the business cycle show
upturns and downturns of the economy.
Four phases of business cycle
peak, contraction, expansion, peak. Business cycle illustrates the general ups and downs of economic activity
(real GDP prises, price level rises, and unemployment rate falls)
eal GDP reaches its maximum and resources are fully employed. When at productivity capacity, unemployment is low
real GDP falls, price level falls, and unemployment rises, inventories rise
"real GDP bottoms out" it is at its lowest point and unemployment is near its highest point.
-The economy will eventually expand. Workers will be hired back, prices will rise, and real output will increase.
The thin upward sloping line through the business cycle symbolizes
the trend of economic growth.
Real GDP declines 6 months
an upturn-Real GDP rises
Business cycle characteristics-Expansion
1. Less unemployment
2. Increase in Real GDP
3. Rapid job growth
Increase in interest rates
5. Increasing prices
6. Fewer social problems (alcoholism domestic violence, divorces and suicides)
Recession is the opposite
What is the relationship between GDP and unemployment
an unemployed person is one that is over 16, non-institutionalized, and actively seeking employment.
is comprised of those people looking for work AND those that are currently working, including part time and full time workers.
measures the percentage of people in the labor force that are
presently unemployed and actively looking for employment.
How do you measure the rate of unemployment
take the number of people that are unemployed and looking for work and divide by the number of people that are working plus the number of people looking for work(labor force).
-To make it a percentage multiply by 100.
The unemployment rate is
because unemployment rate does
NOT count discouraged workers
(people that have given up their job hunt.) They give up finding a job given the state of the job market.
Marginally attached workers
-ended their job search for a reason
other than a belief that no job was available
-They may have gone back to
. Marginally attached workers are also NOT included when calculating the unemployment rate.
Workers who would like to work more hours or are overqualified for their jobs.
They do NOT count as unemployed.
ex: College graduates who work as fast food clerks are considered the same as fully employed
Why is unemployment rate never zero?
A worker who is
quite confident in finding a job has not accepted a position
is counted as unemployed.
There are three main types of unemployment
frictional, structural and cyclical unemployment
is temporary(natural) or seasonal. This includes
recent graduates and people who quit their jobs to find something better
. People are between jobs. Frictional unemployment ALWAYS exists in an economy. There are always people looking for a better job than their first
Also natural. It occurs when certain
skills of laborers are no longer needed
. This includes people who are replaced by
or new industries through
. These people need to retrain or move to find work. There are more people seeking jobs in a labor market than there are jobs available at the current wage rate.
What makes up the natural rate of unemployment at the full employment level of output.
Frictional and Structural unemployment. They are completely normal in an economy
Worst of the three types. Cyclical unemployment is the
result of a recession.
This includes people who are
from work because the
economy has contracted.
-It is associated with a downturn in the business cycle. As
unemployment rate increases beyond its natural rate
, cyclical unemployment now exists and the economy is most likely in recession.
means that prices are rising. The effect of
is that your money has
less purchasing power
. You can buy less stuff with the same income that you had in the past.
How can you measure inflation rate
by examining changes in the consumer price index, which tracks a market basket of common consumer goods and service over time.
-To get the percentage change in the CPI it is simply "new minus old over old times 100."
benefit from sudden inflation since these debits are essentially paying off loans with cheaper dollars. They
make fixed payments.
The real value of their debt is not worth less.
(lenders) are harmed by unanticipated inflation. Creditors are receiving cheaper dollars from debtors.
People who earn
are also negatively affected.
Two types of inflation
demand -pull and cost-push inflation
exists when there is an
increase in aggregate demand and prices rise
. This can happen if the money supply grows faster than the production of goods and services(than output)
The scarier type. This occurs when
production costs increase or a negative supply shock occurs
. Aggregate supply shifts left and we end up with higher prices, but, we also end up with more unemployment. This is a condition known as stagflation
prices generally rise over time, but sometimes prices fall. Deflation occurs when the
inflation rate becomes negative.
is when the rate of inflation
It defines the real interest rate and shows how inflation or expected inflation affects the real interest rate. Businesses that invest in capital goods and households that borrow and/or save money should pay close attention to this equation.
inflation can reduce
real interest rates and real wages.
How does GDP effect unemployment rate
You can conclude that unemployment rate is rising.
What is the base year? How do u know
The real GDP=nominal GDP
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