ECON 2010 TEST ONE 21 1 14 Chapter 4 gdp measuring total production and income business cycle alternating periods of economic expansion economic recession economic growth often refers to the ability of an economy to produce increasing quantities of g s gross domestic product is the primary measure by which economists evaluate an economy the market value of all nal g s produced in within a territory during a period of time calculated by taking a of all output good s price using recognized standards obviously does not count some transactions such as resale goods gov transfer payments sales of stocks bonds work of house spouses public ed army protection etc aka total expenditure or total incomes of capital labor national income accounting a set of rules def for measuring economic activity in the aggregate community way of measuring aggregate production nal good service purchased by a nal user intermediate good service is an input into another g s capital good eliminate double counting calculate only nal output or follow the value added approach value added is calculated by the value of a good s sales intermediate goods transfer payments from the gov for individuals for which the gov doesn t receive a new g s in return social security welfare gross national product aggregate nal output of the citizens and business of a designated territory gnp gdp net foreign factor income four primary categories of gdp gdp c i g nx 1 consumption c spending by households not including new houses services is the single largest component of consumer spending 2 investment i spending by rms on capital and inventory long lived capital goods are treated as nal goods rather than intermediate goods goods residential capital homes apartment buildings are considered capital the goods that a rm produces but doesn t sell during the current period are treated for acct purposes as if the rm had bought those goods from itself 3 gov spending g spending by federal state local govs doesn t include transfer payments 4 net exports nx exports imports an equation for gdp and some actual values consumer spending on services is than the of spending on durable nondurable goods business xed investment is the largest component of investment purchases made by state local govs are purchases made by the fed gov imports exports so net exports are 23 1 14 shortcomings in gdp as a measure of total production household production g s people produce for themselves underground economy buying selling of g s that s hidden from the gov to avoid taxes regulations illegality aka black market shortcomings of gdp as a measure of well being obvious shit use common sense slides about the Great Depression and the gdp the events associated with WWII created a high demand for g s til that time unheard of gdp almost doubled from beginning to end real gdp vs nominal gdp in ation rising price levels in ation rate the increase from one year to the next real gdp the value of nal g s in a given yr at a speci c base yr price level P base year Q current year nominal gdp value of nal g s of a given yr using same yr prices P current year Q current year why does it matter if in ation isn t accounted for the aggregate output value will not mean the same thing across time if accounted for actual changes in output may be observed gdp de ator nominal real 100 gdp de ator real nominal in ation gnp gross national product is useful in calculating statistics in calculating the wealth of the citizens nnp net national product gnp depreciation national income nnp sales taxes consumption or depreciation of capital goods personal income labor income dividends transfer payments gov interest payments disposable personal income p i after taxes best measure of what households can truly spend 30 1 14 Chapter 5 measuring in ation price level measure of overall level of prices at a particular pt in time as measure by an index relative price price of a speci c g s in comparison to the prices of other g s in ation rate increase in the price level from one yr to another cpi in yr 2 cpi in yr 1 cpi yr 1 consumer price index cpi measure of the cost of living during a speci c period basic tool to measure the price level in the u s an average of the prices of the g s purchased by the typical urban family of four a standard basket in a given year relative to the cost of the same basket in the base year 2010 is the base year rn bias cpi current yr base yr 100 four biases substitution bias quality adjustment bias outlet bias new product calculated of cially by the bls cpi and other price indexes ppi core in ation import export in uence policy decisions wage increases poor calculations can unnecessarily increase gov spending underestimate the increase in the cost of living note cpi uses 1982 4 as a base year de ating nominal quantity nominal quantity cpi producer price index ppi allows for tracking in ation in raw materials which can lead to changes in cpi prices transmit info about 1 the cost of production and 2 the marginal utility in ation creates confusion and slows down response to changing prices 4 2 14 tax distortion bracket creep occurs when a household is moved into a higher tax bracket due to increases in nominal but not real income not all taxes are indexed capital depreciation allowance tax reduction equal to the rate capital is expected to depreciate at the time it s purchased u s tax system is super complex federal state city con icts taxes that aren t indexed distort tax incentives manage cash balances to limit losses more frequent smaller withdrawals cost consumers time travel real cost in ation banks process more transactions increasing costs real cost in ation costs of managing cash holding are called shoe leather costs referring to the cost of frequent trips to the bank in times of in ation conservative spending menu costs the costs to rms of changing prices via reprinting altering business before the interwebs rate sheets might be made for a yr incorrect pricing could lead to losses real wage money paid to the worker measured in terms of purchasing power nominal wage cpi indexed labor contract relevant price index is 1 rst year 1 05 second 1 1 third nominal wage real wage price index core rate of in ation the rate of increase of all prices except energy food the two items most frequently responsible for short run uctuations in the in ation rate de ation a decline in the price level associated with periods of extreme recession extreme anti in ationary measures taken