Chapter 7 Key term 1 Define gross domestic product and describe the key phrases of the definition Chapter heading GDP A Measure of Output Gross domestic product the market value of final goods and services produced within a country during a specific time period usually a year is the most widely used indicator of economic performance Provide more details of the key phrases of the GDP definition 1 Only final goods and services count sales at intermediate stages of production are not counted as their value is embodied within the final user good including goods at intermediate stages of production would result in double counting If output is to be measured accurately all goods and services produced during the year must be counted only once most goods go through several stages of production before they end up in the hands of their ultimate users To avoid double counting one must take care to differentiate between intermediate goods and final market goods and services example when a wholesale distributor sells steak to a restaurant the final purchased price paid by the patron of the restaurant for the steak dinner will reflect the cost of the meat double counting would result if we included both the sale price of the intermediate good the steak sold by the wholesaler to the restaurant and the final purchase price of the steak dinner 2 Only transactions involving production count remember GDP is a measure of goods and services produced financial transactions and income transfers are excluded because they merely move ownership from one party to another they do not involve current production and are therefore not included in GPD thus the purchases and sales of stocks bonds and U S securities are not included in the GPD 3 Only production within the country is counted GPD is a measure of domestic product therefore it counts only goods and services produced within the geographical borders of the country Example when foreigners earn income within U S borders it adds to to the GPD of the United States 4 Only goods produced during the current period are counted GPD is the measure of output during the current period Transactions involving the exchange of goods or assets produced during earlier periods are excluded because they do not reflect actual current production example the purchases of second hand goods such as a used car or a home built 5 years ago are not included in this years GDP 2 List the ways to measure gross domestic product and identify the source of higher income levels Chapter heading GDP as a Measure of Both Output and Income Key terms 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 Net exports exports minus imports Gross national product the total market value of all final goods and services produced by the citizens of the country it is equal to GDP minus the net income of foreigners What are the two ways to measure GDP 1 Expenditure approach GDP is calculated by totaling the expenditures on goods and services produced during the year formula personal consumption expenditures gross private domestic investment government consumption and gross investment net exports of goods and services GPD 2 Resource cost income approach GDP can be calculated by summing the income payments to the resource suppliers of the things used to produce those things and services formula Aggregate income compensation of employees wages and saleries income of self employed proprietors rents profits interest nonincome cost items Indirect business taxes Depreciation Net income of foreigners GPD What is the source of higher income levels Increases in output and growth of income are linked so an increase in output that is the additional production of goods and services that people value is the source of higher income levels Components of the expenditure approach 1 personal consumption expenditures 2 gross private domestic investment 3 government consumption and gross investment 4 net exports to foreigners What is the difference between GDP and GNP GNP counts the income that Americans earn abroad but it omits the income foreigners earn in the United States In other words they are equal except that the net income of foreigners must be added when GDP is derived using the resource cost income approach 3 Differentiate between real and nominal GDP Chapter heading Adjusting for Price Changes and Deriving Real Key terms Nominal values values expressed in current dollars Real values values that have been adjusted for the effects of inflation 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 when inflation is present Consumer price index an indicator of the general level of prices it attempts to compare the cost of purchasing the market basket bought by a typical 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 the GDP relative to the cost during a base year currently 2005 unlike the consumer prices of capital goods and other goods and services purchased by businesses and governments Because of this it is thought to be a more accurate measure of the changes in the general level of prices than the CPI Why are nominal values adjusted for inflation Economists must adjust nominal values for inflation because expansion in the production of goods and services people value is the source of higher incomes and living standards across time periods a problem arises the nominal value of GPD may increase as either a result of 1 an expansion in the quantity of the goods produced or 2 higher prices Because only the first will improve our living standards it is very important to distinguish between the two So data must be adjusted for changes in general level of prices at the time What s the difference between the CPI and the GDP Deflator The CPI is designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households while the GDP Deflator is a broader price index than the CPI It is designed to measure the
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