Chapter 7Key Points• Gross domestic product (GDP) is a measure of the market value of final goods and services produced within the borders of a country during a specific time period, usually a year.• Income transfers, purely financial transactions, and exchanges of goods and assets produced during earlier periods are not included in GDP because they do not involve current production.• When derived by the expenditure approach, GDP has four major components:- (1.) Personal Consumption- (2.) Gross private investment- (3.) Government consumption and ross investment- (4.) Net exports• When derived by the resource cost-income approach, GDP equals:- (1.) The direct income components (wages and salaries, self-employment income, rents, interest, and corporate profits) - (2.) Indirect business taxes, depreciation, and the net income of foreigners• Price indexes measure changes in the general level of prices over time. They can be used to adjust nominal values for the effects of inflation. The two most widely used price indexes are the GDP deflator and the consumer price index (CPI).• The rate of inflation is the percentage change in the general level of prices from one year to the next. It is equal to PI2 minus PI1 divided by PI1 multiplied by 100. The inflation rate can be estimated with either the consumer price index or the GDP deflator, and the two alternatives generally yield similar estimates.• The following formula can be used to convert the nominal GDP data of the current period (2) to the real GDP measured in terms of the general level of prices of an earlier period (1):-Real GDP2= Nominal GDP2xGDP Deflator1GDP Deflator2• Even real GDP is an imperfect measure of current production. It excludes household production and the underground economy, fails to take leisure and human costs into account, and adjusts imperfectly for quality changes.• Real GDP is vitally important because it is a reasonably accurate measure of how well the economy is doing compared to the recent past. Per capita GDP is a broad indicator of income levels and living standards across time periods. Key Terms• Intermediate Goods , Goods purchased for resale or for use in producing another good or service.• Final Market Goods and Services , Goods and services purchased by their ultimate user.• Personal Consumption , Household spending on consumer goods and services during the current period. Consumption is a flow concept.• Private Investment , The flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future. • Depreciation , The estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.• Inventory Investment , Changes in the stock of unsold goods and raw materials held during a period.• Net Exports , Exports minus imports.• Exports , Goods and services produced domestically but sold to foreigners.• Imports , Goods and services produced by foreigners but purchased by domestic consumers, businesses, and governments.• Indirect Business Tax , taxes hat increase a business firm’s cost of production and, therefore, the prices charged to consumers. Examples are sales, excise, and property taxes.• National Income , The total income earned by a country’s nationals (citizens) during a period. It is the sum of employee compensation, self- employment income, rents, interest, and corporate profits. • Gross National Product (GNP), The total market value of all final goods and services produced by the citizens of a country. It is equal to the GDP minus the net income of foreigners.• Net Income of Foreigners , The income that foreigners earn by contributing labor and capital resources to the production of goods within the borders of a country minus the income the nationals of the country earn abroad.• Nominal Values , Values expressed in current dollars.• Real Values , Values that have been adjusted for the effects of inflation.• Consumer Price Index (CPI) , A indicator of the general level of prices. It attempts to compare the cost of purchasing he market basket bought by atypical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.• GDP Deflator , A price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year (currently 2005). Unlike the consumer price index (CPI), the GDP deflator also measures the prices of capital goods and other goods and services purchased by business and governments. Because of this, it is thought to be more accurate measure of changes in the general level of prices than the CPI.• Inflation , An increase in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines with inflation present. • Nominal GDP , GDP expressed at current prices. It is often called money GDP.• Real GDP , GDP adjusted for the changes in the price level.• Underground Economy , Unreported barter and cash transactions that take place outside recorded market channels. Some are otherwise legal activities undertaken to evade taxes. Others involve illegal activities, such as trafficking drugs and prostitution. Chapter 16Key Points• The economic growth of the past two centuries has been unprecedented. While the per person income of the world increased by only about 50 percent during the 800 years from 1000 to 1800, it has increased by tenfold during the past 200 years. The growth of per person income in the west since 1800 has been even more impressive.• Economic growth increases the production possibilities of an economy. The growth of per capita real GDP means more goods and services per person, which typically lads to higher living standards and improvements in life expectancy, literacy, and health.• Even seemingly small differences in growth rates sustained over two or three decades will substantially alter relative incomes. For example, if Country A and Country B have the same initial income but the growth rate of A is 2 percentage points greater than that of B, after 35 years the income level of Country A will be twice that of B.• Economic growth is a complex process. Economists
View Full Document
Unlocking...