Cpa Business Stuff

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GDP

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Gross Domestic Product (GDP). GDP is the total market
value of all final goods and services (the term "final goods and services" excludes used
goods that have been resold) produced within the borders of a nation in a particular time
period (i.e., the nation's output of goods and services).

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Nominal GDP

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(unadjusted) measures the value of all final goods and services in prices
prevailing at the time of production. That is, nominal GDP measures the value of all
final goods and services in current prices.

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Real GDP

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That is, real GDP is adjusted to account for changes in the price
level (i.e., it removes the effects of inflation by using a price index). Real GDP is
the most commonly used measure of economic activity and national output (i.e.
the total output of an economy).

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Price Index (GDP Deflator)

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The price index used to calculate real GDP is called the GDP Deflator. It is a
price index for all goods and services included in GDP. Using the GDP deflator,
real GDP is calculated as the ratio of nominal GDP to the GDP deflator times
100.

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Price Index (GDP Deflator) - Equation

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Real GDP = Nominal GDP / GDP Deflator)( x 100

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RECESSION

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A recession occurs when the economy experiences negative real economic growth (declines
in national output). Economists define a recession as two consecutive quarters of falling
national output.

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DEPRESSION

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A depression is a very severe recession. It is characterized by a relatively long period of
stagnation in business activity and high unemployment rates.

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Economic Indicators

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Although business cycles tend to be irregular and unpredictable, economists nevertheless attempt
to predict business cycles and their severity and duration using economic indicators. Economic
indicators (gathered by The Conference Board) are variables that have historically correlated highly
with economic activity. They can be "leading indicators," "lagging indicators," or "coincident
indicators."

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LEADING INDICATORS (8)

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1. Average new unemployment claims
2. Building permits for residences
3. Average length of the workweek
4. Money supply
5. Prices of selected stocks
6. Orders for goods
7. Price changes of materials
8. Index of consumer expectations

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LAGGING INDICATORS (3)

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Lagging indicators tend to follow economic activity. They give signals after the fact and
include the following:
1. Prime rate charged by banks
2. Average duration of unemployment
3. Bank loans outstanding

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COINCIDENT INDICATORS (2)

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Coincident indicators tend to occur coincident to economic activity. They include the
following:
1. Industrial production
2. Manufacturing and trade sales

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AGGREGATE DEMAND (AD) CURVE

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The aggregate demand (AD) curve illustrates the maximum quantity of all goods and services
that households, firms, and the government are willing and able to purchase at any given
price level.

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Long-Run Aggregate Supply Curve

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The long-run aggregate supply (LRAS) curve is vertical, illustrating the fact that in the
long-run, if all resources are fully utilized, output is determined solely by the factors of
production. This curve corresponds to the potential level of output in the economy.

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FACTORS THAT SHIFT AGGREGATE DEMAND (6)

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1. Changes in Wealth
2. Changes in Real Interest Rates
3. Changes in Expectaionts about the Future Economic Outlook
4. Changes in Exchange Rates
5. Changes in Govt Spending
6. Changes in Consumer Taxes

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THE MULTIPLIER EFFECT

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The multiplier effect refers to the fact that an increase in consumer, firm, or government
spending, produces a multiplied increase in the level of economic activity.

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THE MULTIPLIER EFFECT (Equation0

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Multiplier = (1/ 1-MPC) = Change in Spending−
Note: The examiners could refer to "1 – MPC" as the marginal propensity to save (MPS), so

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FACTORS THAT SHIFT SHORT-RUN AGGREGATE SUPPLY (2)

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1. Changes in Input (Resource) Prices
2. Supply Shocks

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Two Methods of Measuring GDP (2)

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1. The Expenditure Approach
2. The Income Approach

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The Expenditure Approach (4)

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G ---Government purchases of goods and services
I---- Gross private domestic investment (nonresidential fixed investment, residential fixed
investment, and change in business inventories)
C ------Personal consumption expenditures (durable goods, non-durable goods, and services)
E ------Net exports (exports minus imports)

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The Income Approach

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I ----Income of proprietors
P ----Profits of corporations
I ---- Interest (net)
R ---- Rental income
A ---- Adjustments for net foreign income and miscellaneous items
T ----- Taxes (indirect business taxes)
E ---- Employee compensation (wages)
D ---- Depreciation (also known as capital consumption allowance)

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Comparison of Approaches

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The different approaches to preparing an "income statement" for the domestic economy (the
GDP) are shown in the table below.
1. The aggregate expenditures approach on the left is a flow-of-product approach (at
market prices).
2. The income approach on the right is a flow of earnings and costs approach (valueadded
items plus taxes).

Final Amount will be the same.

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Other Metods of National Income (6)

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1. Net Domestic Product
2. Gross National Product (GNP)
3. Net National Product (NNP)
4. National Income (NI)
5. Personal Income (PI)
6. Disposable Income (DI)

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Net Domestic Product

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Net domestic product (NDP) is GDP minus depreciation (the capital consumption
allowance), the expenditure necessary to maintain production capacity (or
"depreciation" to accountants).

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Gross National Product (GNP)

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GNP is defined as the market value of final goods and services produced by residents
of a country in a given time period. GNP differs from GDP because GNP includes
goods and services that are produced overseas by U.S. firms and excludes goods and
services that are produced domestically by foreign firms. For example, if BMW
produces cars in the U.S., that production is counted as part of U.S. GDP,

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Net National Product (NNP)

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Net national product (NNP) is defined as the total income of a country's residents less
losses from economic depreciation (i.e., losses in the value of capital goods due to age
and wear). Thus, NNP equals GNP minus economic depreciation. This depreciation is
not accounting depreciation, which is allocation of costs to accounting periods.

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National Income (NI)

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National income (NI) is NNP less indirect business taxes (e.g., sales tax). It measures
the income received by all factors of production within a country.

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Personal Income (PI)

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Personal Income (PI) is the income received by households and noncorporate
businesses. Specifically,
NI
Less: Undistributed corporate profits (retained earnings)
Net interest
Contributions for social measures (social security contributions)
Corporate income taxes
Plus: Government transfer payments to individuals
Personal interest income
Business transfer payments/dividends

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Disposable Income (DI)

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Disposable Income (DI) is personal income less personal taxes. It is the amount of
income households have available either to spend or save.

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Unemployment Rate

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THE UNEMPLOYMENT RATE
The unemployment rate measures the ratio of the number of people classified as unemployed to
the total labor force. The total labor force includes all non-institutionalized individuals 16 years of
age or older who are either working or actively looking for work. (An unemployed person is defined
as a person 16 years of age or older who is available for work and who has actively sought
employment during the previous four weeks.)

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Unemployment Rate (Equation)

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Unemployment Rate = (Number of Unemployed/
Total Labor Force) x 100

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Types of Unemployment

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1. Frictional Unemployment
2. Structural Unemployme
3. Seasonal Unemploymentnt
4. Cyclical Unemployment

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Frictional Unemployment

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Frictional unemployment is normal unemployment resulting from workers routinely
changing jobs or from workers being temporarily laid off. It is the unemployment that
arises because of the time needed to match qualified job seekers with available jobs.

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Structural Unemployment (2)

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Structural unemployment occurs when:
a. Jobs available in the market do not correspond to the skills of the work force, and
b. Unemployed workers do not live where the jobs are located.

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Seasonal Unemployment

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Seasonal unemployment is the result of seasonal changes in the demand and supply
of labor. For example, shortly before Christmas, the demand for labor increases and
then decreases again after Christmas.

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Cyclical Unemployment

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Cyclical unemployment is the amount of unemployment resulting from declines in real
GDP during periods of contraction or recession or in any period when the economy
fails to operate at its potential. When real GDP is below the potential level of output,
cyclical unemployment is positive. When real GDP is above the potential level of
output, cyclical unemployment is negative. Thus, cyclical unemployment rises during a
recession and falls during an expansion.

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Natural Rate of Unemployment

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The natural rate of unemployment is the "normal" rate of unemployment around which
the unemployment rate fluctuates due to cyclical unemployment. Thus, the natural rate
of unemployment is the sum of frictional, structural, and seasonal unemployment or the
employment rate that exists when the economy is at its potential output level (recall
that the position of the Long-Run Aggregate Supply (LRAS) curve is determined by the
potential level of output).

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Full Employment

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Full employment is defined as the level of unemployment when there is no cyclical
unemployment. Full employment does not mean zero unemployment. When the
economy is operating at full employment, there is still frictional, structural, and seasonal
unemployment.

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THE PRICE LEVEL AND INFLATION

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1. Inflation
2. Deflation
3. Inflation/Deflation Rate

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Inflation

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Inflation is defined as a sustained increase in the general prices of goods and services.
It occurs when prices on average are increasing over time.

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Deflation

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Deflation is defined as a sustained decrease in the general prices of goods and
services. It occurs when prices on average are falling over time. Most economists
believe deflation is a much bigger economic problem than inflation. During periods of
deflation, firms are likely to experience significant excess production capacity. This
occurs because consumers tend to hold off purchasing goods and services during a
period of deflation because they realize the price of goods and services is likely to
continue to

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Inflation/Deflation Rate

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Consumer Price Index (CPI)
The CPI is a measure of the overall cost of a fixed basket of goods and services
purchased by an average household. (The Producer Price Index (PPI) measures

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Consumer Price Index (CPI) Equation

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Inflation Rate = (CPI-this periond - CPI last Period / CPI last Period) x 100