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What is gdp?

What is gdp?

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3/31/16


What is gdp?



Exam 2 Study Guide

Chapter 7

• National income accounting-the techniques used to measure the overall  production of a country’s economy

• GDP-defines output as a dollar value for all final goods and services produced  within the borders of one country

• Intermediate goods-products that are purchased for resale or further processing  or manufacturing

• Final goods-products that are purchased by their end users

• Multiple counting-including in the GDP the value of intermediate goods as well  as final goods

• Value added-the market value of a firm’s output less the value of the inputs the  firm has bought from others (the value a company has added to a good) • Public transfer payments-not included in GDP, government payments for welfare  and social security


What is the decline in the general level of prices in an economy?



• Private transfer payments-not included in GDP, transfer of money from one  individual to another

• Stock market transactions-not included in GDP, buying and selling stocks • Expenditures approach-view GDP as the sum of all the money spent in buying all  the goods produced

o Personal consumption expenditures-the expenditures of a household on  durable and non-durable goods

▪ Durable goods-products that have expected lives of three years or more  (10% of PCE)

▪ Nondurable goods-products with less than three years expected life (30%  of PCE) Don't forget about the age old question of What is digestive system?

▪ Services-the work done by lawyers, hair stylists, doctors, mechanics  (60% of PCE)


What is a recession?



We also discuss several other topics like What is multidirectional?

o Gross private domestic investment-all final purchases of machinery,  equipment, and tools, all construction, changes in inventory, and money  spent of research and development (all included in GDP)

o Net private domestic investment-only investments in the form of added  capital (=gross investment – depreciation)

o Government purchases-expenditures for goods and services that government  consumes in providing public services, expenditures for publicly own capital  (schools and highways), and government expenditures on R&D

o Net exports = exports – imports

o GDP = personal consumption expenditures + gross private domestic  investment + government purchases + exports - imports

• Income approach-view GDP through understanding the income and rent of the  production of all the goods

o Compensation of employees-wages and income paid by business to  employeesIf you want to learn more check out What is absolute monarchy in France?

o Rents-income received by households and businesses that supply property  resources

o Interest-money paid by private businesses to the suppliers of loans used to  purchase capital

o Proprietors’ income-net income of sole proprietor, partnerships, and other  unincorporated businesses

o Corporate profits-earnings of corporations

o Taxes on production and imports-sales tax, excise tax, business property tax,  license fees, and custom duties

o National income-the total of all sources of private income plus government  revenue from taxes on production and imports

o Consumption of fixed capital-huge depreciation charge made against private  and publicly owned capital each year (money lost to the “consumption” or  use of capital)

• Net domestic product = GDP – consumption of fixed capital (GDP adjusted for  depreciation)

• Personal income-includes all income receive, whether earned or unearned • Disposable income-personal income less personal taxes

• Nominal GDP-real GDP adjusted to one specific year’s value of all goods o Price index-measure of the price of a specified collection of goods and  services in a given year as compared to the price of an identical collection of  goods and services in a reference year

o Base year-the year that all prices of the collection of goods are based off of o Price index = (price of market basket for a specific year) / (price of same  market basket in base year) If you want to learn more check out What is murder and non­negligent (voluntary) manslaughter?

o Real GDP = nominal GDP / price index

Chapter 8

• Economic growth-an increase in real GDP or GDP per capita over some period of  time

• Real GDP per capita = real GDP / population

• Rule of 70-provides a quantitative grasp of the effect of economic growth o Approximate numbers of years required to double GDP = 70 / annual  percentage rate of growth

• Growth has lead to improved goods and services, added leisure, and has had  effects on the environment and quality of life

• Modern economic growth-sustained ongoing increases in living standards that  can cause dramatic increases in the stand of living within less than a single  human lifetime, brought about by the industrial revolution in the 1900’s

• Leader countries-countries that develop and use the most advanced technology • Follower countries-countries that use advanced technology that was developed  by leader countries

• Industrial structures that promote modern economic growth o Strong property rights

o Patents and copyrights

o Efficient financial institutions

o Literacy and widespread education

o Free trade Don't forget about the age old question of What causes the proximity effect?

o Competitive market system

• Supply factors-increases in the quantity and quality of natural and human  resources, increases in supply of capital goods, and improvements in technology • Demand factor-to actually achieve higher production potential created when the  supply factors increase of improve, households, businesses, and the government  must also expand their purchases of goods and services so as to provide a  market for all the new output that can potentially be produced

• Efficiency factor-to reach its full production potential, an economy must achieve  economic efficiency as well as full employment

• Labor productivity-measured as real output per hour of work, total output  divided quantity of labor employed to produce it

• Labor-force participation rate-the percentage of the working-age population  actually in the labor force We also discuss several other topics like What is actus reus in law?

• Growth accounting-the bookkeeping of the supply side elements such as  productivity and labor inputs that contribute to changes in real GDP over some  specific period of time

o Technological advance-accounts for 40% of productivity growth, innovative  as well as managerial advances

o Growth of capital-30% of productivity growth, includes infrastructure  (highways and bridges, public transit systems, wastewater treatment  facilities, water systems, airports, educational facilities, and so on)

o Education and training-15% of productivity growth, includes human capital  (the knowledge and skills that make a person more productive)

o Economies of scale and resource allocation-15% of productivity growth • Information technology-new and more efficient ways of delivering and receiving  information through the use of computers, WiFi, wireless phones, and the  Internet

• Start-up firm-a firm focused on creating and introducing a particular new  product or employing a specific new production or distribution method • Increasing returns-a situation in which a given percentage increase in the  

amount of inputs a firm uses leads to an even larger percentage increase in the  amount of output the firm produces

• Network effect-the idea that each new product sold has an increased value (ex.  cell phones and the Internet)

• Learning by doing-perfecting new production techniques  

Chapter 9

• Business cycle-recurring increases and decreases on the level of economic  activity over periods of years

o Peak-the point in the business cycle at which business activity has reached a  temporary maximum, the point at which the recession begins

o Recession-a period of declining real GDP, accompanied by real income and  higher unemployment

o Trough-the point in a business cycle at which business activity has reached a  temporary minimum, the point at which expansion begins

o Expansion-the phase in the business cycle in which real GDP, income, and  employment rises

• Reasons for fluctuations in real GDP

o Irregular innovations-new innovations expand the market while they are  being introduced, but lead to a decline after they are fully introduced into the  market

o Productivity changes-output per unit of input increases leads to expansion in  real GDP but lack of increases leads to decline in real GDP

o Monetary factors-nation’s central banking system can alter real GDP with  increase or decrease of circulating money

o Political events-government policies can cause shocks to real GDP o Financial instability-bubbles or bursts can affect real GDP

• Durable goods-goods that last more than three years, most affected by business  cycle (ex. cars, computers, fridges, household appliances)

• Non-durable goods-goods that last less than three years, somewhat insulated  from the effects of recession and expansion  

• Labor force-persons 16 years of age and older who are not in institutions and  who are employed or are unemployed and seeking work

• Unemployment rate-the percentage of the labor force that is unemployed at any  time (unemployed/labor force X 100%)

o Part-time employment is labeled as employed even if they want to be full time

o Discouraged workers-employees who have left the labor force because they  have not been able to find employment (not included in the labor force and  thus makes the unemployment rate seem lower)

• Frictional unemployment-a type of unemployment caused by workers  voluntarily changing jobs and by temporary layoffs; unemployed workers  between jobs (sometimes lasts longer due to benefits of unemployment checks)

• Structural unemployment-unemployment of workers whose skills are demanded  by employers, who lack sufficient skill to obtain jobs, or who cannot easily move  to locations where jobs are available (more long-term unemployment)

• Cyclical unemployment-a type of unemployment caused by insufficient total  spending and which typically begins in the recession phase of the business cycle • Full-employment rate of unemployment-the unemployment rate at which there  is no cyclical unemployment of the labor force, between 5 and 6 percent in the  US because structural and frictional unemployment are impossible to avoid • Natural rate of unemployment-the full-employment rate of unemployment; the  unemployment rate occurring when there is no cyclical unemployment and the  economy is achieving its full potential output

• Potential output-the real GDP an economy can produce when it fully employs its  available resources

• GDP gap-actual GDP minus potential output, can be positive or negative • Okun’s Law-the generalization that any 1-percentage point rise in the  unemployment rate above the full-employment rate of unemployment is  associated with a rise in the negative GDP gap by 2 percent of potential output  (in 2009 unemployment rate was 4.3% above 5% natural rate and the economy  gave up 8.6% of real GDP)

• Inflation-a rise in the general level of prices in an economy, each dollar will buy  fewer goods and services

• Consumer price index-an index that measures the prices of a fixed “market  basket” of 300+ goods and services bought by a typical consumer (CPI=price of  designated year’s market basket/price estimate of base year’s market basket X  100%)

• Deflation-a decline in the general level of prices in an economy • Rate of inflation=(price of market basket in recent year – price of market basket  in base year)/price of market basket in base year X 100%

• Demand-pull inflation-increases in the price levels resulting from increases in  aggregate demand, excess demand drives up the prices of limited output • Cost-push inflation-increases in price levels resulting from an increase in  resource costs and per-unit production costs

• Government has different strategies to balance the effects of inflation based on  whether the cause of inflation is demand-pulling or cost-pushing • Core inflation-the underlying increases in price level after volatile food and  energy prices are removed

• Nominal income-the number of dollars received by an individual or group for its  resources during some period of time

• Real income-the amount of goods and services that can be purchased with  nominal income during some period of time, adjusted for inflation (=nominal  income/price index in hundredths)

• Unanticipated inflation-an increase in the price level at a rate greater than  expected (government wants inflation rate at 2% per year)

o People who receive fixed incomes are hurt by large inflation o People who save see their savings become less effective with large inflation  (Germany after WWI)

o Lenders see their loans become worthless as inflation rates increase • Cost-of-living adjustments-union workers have built-in adjustments to their  income if inflation rates increase significantly

• Real interest rates-the interest rate expressed in dollars of constant value  (adjusted for inflation) and equal to the nominal interest rate less the expected  rate of inflation

• Nominal interest rate-the interest rate expressed in terms of annual amounts  currently charged for interest and not adjusted for inflation

• Hyperinflation-a very rapid rise in the price level; an extremely high rate of  inflation (Germany after WWI)

Chapter 10

• 45 degree reference line-two dimensional graph that illustrates all the points  where consumption equal disposable income where savings equals 0, graphed  on the same plot as actual consumption vs. disposable income, the difference  between actual and reference line equals savings

• Consumption schedule-a table of numbers showing the amounts households  plan to spend for consumer goods at different levels of disposable income • Saving schedule-a table of numbers that shows the amounts households plan to  save at different levels of disposable incomes

• Break-even income-the level of disposable income at which households plan to  spend all their disposable income and save none

• Average propensity to consume (APC)=consumption/income • Average propensity to save (APS)=saving/income

• APS + APC = 1

• Marginal propensity to consume (MPC)=∆ in consumption/∆ in income • Marginal propensity to save (MPS)=∆ in savings/∆ in income • Non-income determinants of consumption and savings

o Wealth effect-the tendency for people to increase their consumption  spending when the value of their financial and real assets rises and to  decrease their consumption spending when the value of those assets falls

o Borrowing increases consumption spending beyond what’s possible without  loans, makes incomes go further

o Expectations can affect consumption spending (ex. expectations that the  prices of fridges will increase will increase current consumption spending) o Real interest rates-when rates are lower, households will save less and spend  more on consumption goods and borrow more

o Increases in taxes decrease disposable income while not changing real GDP • Expected rate of return=(net profit from capital goods – cost of capital  good)/cost of capital good

o Interest rates can decrease profits from investment in capital o Inflation can decrease the effectiveness of the money borrowed (ex. rate of  return=10%, interest rates=15%, and inflation=10%, the investment is still  profitable because interest rate – inflation 5% is less than rate of return 10%  ???? profit from the capital investment)

• Investment demand curve-a curve that shows the amount of investment  demanded by an economy at a series of real interest rates

• Shifts in investment demand curve

o When cost of maintenance of capital goods increase, the expected rate of  return decreases and investment demand curve shifts left

o As business taxes increases, investment demand curve shifts left o Improvements in technology and production efficiency shifts investment  demand curve right

o When the economy is overstocked with production facilities and excess  inventory, the investment demand curve shifts left as the expected rate of  return decreases

o If firms plan to increase their inventories, the investment demand curve  shifts right

o If executives are optimistic about future sales and production, the investment  demand curve shifts right  

o Investments is the most volatile spending

o Expectations can quickly change and alter investment spending o Capital goods can be used longer than expected and older equipment can be  fixed to lengthen its lifespan

o Innovations are inconsistent and alter profits which alter investment  spending

o Profits can quickly change and alter the investment spending • Multiplier-the ratio of a change in equilibrium GDP to the change in investment  or in any other component of aggregate expenditures or aggregate demand (=∆  in real GDP/initial ∆ in spending)

o Initial change in spending (usually by government) will set off a spending  chain throughout the economy that will grow the real GDP rapidly o Example-government spends $5 billion and goes to profits, wages, etc ???? multiply by propensity to consume (0.75) and $3.75 billion is spent ???? repeat  multiplying by 0.75 and $2.81 billion is spent ???? $20 billion increase in real  GDP ($15 billion spent and $5 billion saved)

o Multiplier=1/(1-MPC)

o Multiplier=1/(MPS)

o Increase in real GDP is not actually that large because some consumption is  spent on imports and to pay additional taxes

o Increase in real GDP can be less than calculated because inflation can occur  and decrease the effects of government stimulus (increases in spending can  lead to inflation)

o Actual multiplier is in reality much lower than the calculated multipliers

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