Macroeconomics - Ch 7

Question 1

National income accounting

Answer 1

measures the economy’s overall performance; compiled by the Bureau of Economic Analysis (BEA)

Question 2

Aggregate output

Answer 2

primary measure of the economy’s performance; annual total output of goods/services

Question 3

Gross Domestic Product (GDP)

Answer 3

aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year

Question 4

Intermediate goods

Answer 4

products purchased for resale or further processing or manufacturing

Question 5

Final goods

Answer 5

products purchased by their end users

Question 6

Multiple counting

Answer 6

counting the value of intermediate goods as well as final good; distorts GDP

Question 7

Value added

Answer 7

market value of a firm’s output less the value of the inputs the firm has bought from others

Question 8

Nonproduction transactions

Answer 8

excluded from GDP; have nothing to do with the generation of final goods; two types - purely financial transactions & secondhand sales

Question 9

Purely Financial Transactions

Answer 9

Public transfer payments, private transfer payments, stock market transactions

Question 10

Public transfer payments

Answer 10

social security payments, welfare payments, veterans’ payments that the government makes directly to households

Question 11

Private transfer payments

Answer 11

money that parents give children, cash gifts given during holidays; produce no output

Question 12

Stock market transactions

Answer 12

buying and selling of stocks and bonds; “swapping paper”

Question 13

Secondhand sales

Answer 13

contribute nothing to production; excluded from GDP; ex. selling a used car to a friend

Question 14

Output (expenditures) approach

Answer 14

GDP as the sum of all the money spent in buying it

Question 15

Earnings (allocation) (income) approach

Answer 15

GDP in terms of the income derived or created from producing it

Question 16

Personal consumption expenditures (C)

Answer 16

consumption expenditures by households on goods and services; durable goods, nondurable goods, services

Question 17

Durable goods

Answer 17

10% of personal consumption expenditures; products that have expected lives of 3 years or more (autos, furniture, refrigerators)

Question 18

Nondurable goods

Answer 18

30% of personal consumption expenditures; products with less than 3 years of expected life (food, clothing, gasoline)

Question 19

Services

Answer 19

60% of personal consumption expenditures; work done by lawyers, hair stylists, doctors, mechanics, etc.

Question 20

Service economy

Answer 20

US economy; due to high % of personal consumption expenditures on services (60%)

Question 21

Gross private domestic investment

Answer 21

all final purchases of machinery, equipment, and tools by business enterprises, all construction, changes in inventories (unsold goods = increase in inventory); used to tally up GDP

Question 22

Net private domestic investment

Answer 22

includes only investment in the form of added capital; = gross investment - depreciation; negative when gross investment is less than depreciation (divesting); zero when gross investment and depreciation are equal; positive when gross investment exceeds depreciation

Question 23

Depreciation

Answer 23

the amount of capital that is used up over the course of a year

Question 24

I

Answer 24

symbol national income accountants use for private domestic investment spending; subscript g (gross); subscript n (net); Ig = used for GDP

Question 25

Government purchases (G)

Answer 25

government consumption expenditures and gross investment; expenditures for goods/services the government consumes in providing public services and expenditures for publicly owned capital such as schools and highways; include all gov’t expenditures on final goods and all direct purchases of resources, including labor

Question 26

GDP Formula

Answer 26

C + Ig + G + X (exports) - M (imports) or C + Ig + G + Xn

Question 27

Net exports (Xn)

Answer 27

exports (X) - imports (M)

Question 28

National income

Answer 28

employee compensation (largest portion of Nat’l income); rents, interest, proprietors’ income, corporate profits, taxes on production & import; total of all sources of private income plus gov’t revenue from taxes on production and imports

Question 29

Corporate profits

Answer 29

corporate income taxes, dividends, undistributed corporate profits (retained earnings)

Question 30

Taxes on production/imports

Answer 30

general sales taxes, excise taxes, business property taxes, license fees, customs duties; accounts for expenditures diverted to the government

Question 31

Net foreign factor income

Answer 31

adjusting GDP by taking out the income Americans gain from supplying resources abroad and add in the income that foreigners gain by supplying resources in the US

Question 32

Consumption of fixed capital

Answer 32

huge depreciation charge against private and publicly owned capital each year; allowance for capital that has been consumed in producing the year’s GDP

Question 33

Net domestic product (NDP)

Answer 33

= GDP - consumption of fixed capital (depreciation); measures total annual input that the entire economy can consume without impairing its capacity to produce in ensuing years

Question 34

Personal income (PI)

Answer 34

all income received, whether earned or unearned

Question 35

Disposable income (DI)

Answer 35

personal income less personal taxes; amount of income households have left over after paying their personal taxes; = C (consumption) + S (saving)

Question 36

Nominal GDP

Answer 36

GDP based on prices that prevailed when the output was produced; AKA unadjusted GDP

Question 37

Real GDP

Answer 37

GDP that has been deflated or inflated to reflect changes in the price level is adjusted GDP; nominal GDP divided by price index (in hundredths)

Question 38

Price Index

Answer 38

measure of the price of a specific collection of goods and services (market basket) in a given year as compared to the price of an identical (or highly similar) collection of goods/services in a reference year; nominal GDP divided by real GDP