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39 Cards in this Set
- Front
- Back
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2 principles: Simple circular flow of income
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1) In every economic exchange, the seller receives exactly the same amount that the buyer spends.
2) Goods and services flow in one direction and money payments flow in the other. |
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Why is profit a cost of production?
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Profits are the return entrepreneurs receive for the risk they incur when organizing productive activities.
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Final goods and services
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final stage of production
-will not be transformed into yet other goods or service |
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Product markets
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transaction in which households buy goods
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Factor markets
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transactions in which businesses buy resources
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Total income
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=wages+ rent+ interest+ profits
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Why must total income be identical to the dollar value of total output?
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Every transaction simultaneously involves an expenditure and a receipt.
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National income accounting
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A measurement system used to estimate national income and its components
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Total income
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The yearly amount earned by the nation’s resources (factors of production)
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GDP
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Gross domestic product
--The total market value of all final goods and services produced by factors of production located within a nation’s borders |
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GDP measures the ______ of final output
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dollar value
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GDP measures the ____ of final goods and services produced per year by ____ of ____ located within a nations borders.
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dollar value, factors of production
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Intermediate goods
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Goods used up entirely in the production of final goods
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Value added
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The dollar value of an industry’s sales minus the value of intermediate goods (for example, raw materials and parts) used in production
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transactions that have nothing to do with final goods and services being produced
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Financial transactions
Transfer Payments Secondhand Goods |
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National income accounting: Exclusion of financial transactions
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Securities
Stocks and bonds Government transfer payments Social Security Unemployment compensation Private transfer payments Individual gifts Corporate gifts |
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GDP's limitations
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Excludes non-market production
It is not necessarily a good measure of the well-being of a nation. |
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GDP is a measure of ___ and not a measure of _____.
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GDP is a measure of the value of production in terms of market prices, and an indicator of economic activity.
GDP is not a measure of a nation’s overall welfare. |
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Expenditure approach
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Computing GDP by adding up the dollar value at current market prices of all final goods and services
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Income approach
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Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits
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Durable Consumer Goods
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Life span of more than three years
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Nondurable Consumer Goods
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Goods that are used up in three years
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Services
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Mental or physical help
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Gross private domestic investment (I)
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The creation of capital goods (factories) that yield production and hence consumption in the future
--producer durables or capital goods --fixed investment --inventory investment |
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Government expenditures (G)
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State local and federal
-valued at cost |
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Net exports (foreign expenditures)
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Net exports (X) =total exports - total imports
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GDP=
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GDP=C+I+G+X
Where C = consumption expenditures I = investment expenditures G = government expenditures X = net exports |
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NDP
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net domestic product
NDP=GDP- depreciation deduction for depreciation (capital consumption allowance) NDP=C+I+G+X-Depreciation |
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Net investment
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Net investment= I- Depreciation
domestic investment minus an estimate of the wear and tear on the existing capital stock NDP=C+Net I+G+X |
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Gross domestic income (GDI)
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the sum of all income (wages, interest, rent and profits) paid to the four factors of production
Wages: salaries and labor income Rent: farms, houses, stores Interest: savings accounts Profits: sole proprietorships, partnerships, corporations |
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GDP=
(income approach) |
gross domestic income plus indirect business taxes and depreciation.
--indirect business taxes and depreciation are called nonincome expense items |
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Nominal values
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measurements in terms of the actual market prices at which goods are sold; expressed in current dollars aka money values
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Real values
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Measurements after adjustments have been made for changes in the average of prices between years; expressed in constant dollars
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Constant dollars
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- dollars expressed in terms of real purchasing power
- this price-corrected GDP is the real GDP |
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Correcting GDP for price index changes
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- nominal (current) dollars GDP
- real (constant) dollars GDP |
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Real GDP=
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Nominal GDP/ Price index x 100
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Per capita GDP=
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Real GDP/ population
- adjusting for population growth |
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Foreign exchange rates
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the price of one currency in terms of another
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Purchasing power parity
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adjustments in exchange rate conversions that takes into account differences in the true cost of living across
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