Download 2: GDP VOCABULARY (with some additional terms) National

2: GDP
VOCABULARY (with some additional terms)
National Income Accounting – a look at the entire nation’s performance
Gross Domestic Product (GDP) – The total market value of all final goods and services produced in a
certain year
Gross National Product (GNP) – The total goods and services produced by domestically owned resources
that are located both abroad and within a nation’s borders
Net Domestic Product (NDP) – Measure of economy’s productivity by accounting for depreciation
Intermediate Goods – Goods and services that are purchased for further processing or manufacturing
Final Goods – Goods and services purchased for final use
Value Added – Market value of a firm’s output is less than the inputs a firm bought from others. Yes, it is
awkwardly worded. Check page 118 in the textbook
Nonproduction Transactions (Financial Transactions) – Monetary transactions that do not involve final
goods and services
Expenditures Approach – GDP is looked at as the sum of all money spent in buying it
Income Approach – GDP is looked at as income derived or created from producing it
Personal Consumption Expenditures (C) – Spending on durable and nondurable goods and services
Gross Private Domestic Investment (Ig) – Various investments made by firms
Government Purchases (G) – Government spending
Net Exports (Xn) – Total revenue generated from exports (imports are subtracted as “neg. exports”)
Net Private Domestic Investment – Investment in the form of added capital
Depreciation – Capital that is used up over the course of a year
National Income (NI) – All the income that flows to American-supplied resources, here and abroad
Personal Income (PI) – All income received earned or unearned
Disposable Income (DI) – Income households have left over after paying personal taxes
Indirect Business Taxes – General sales, excise, business property, license fee, and customs duties taxes
Consumption of Fixed Capital – The spending of private and social capital
Net Foreign Factor Income Earned in U.S. (NFFIEUS) – Money earned by workers that ends up being
used in other economies
Nominal GDP – GDP based on prices during period of production
Real GDP – GDP that accounts for price level adjustments
Price Index (not PI) – Measure of the price of a specified collection of goods and services in a given year
as compared to the price of a similar collection of goods and services in a reference year
Base Year – The initial year (ONLY USED WITH PRICE INDEX, NOT CPI)
Consumer Price Index (CPI) – Index by the BLS that is used by the government to see inflation changes
each month
Per Capita Output – How much each person in the population contributes to the GDP
Productivity – Real output per unit of input
Business Cycle – Alternating rises and declines in economic activity over a course of approx. 10 years
Labor Force – People able and willing to work
Discouraged Workers – Those that unsuccessfully seek employment and drop out of labor force
Frictional Unemployment – “Search” and “Waiting” unemployment
Structural Unemployment – Changes in consumer demand and technology make certain skills obsolete
Cyclical Unemployment – “bad unemployment”; an economic downturn in business cycle as demand for
goods and services decrease
Natural Rate of Unemployment (NRU) – Job vacancies is equivalent to number of job seekers and 0%
cyclical unemployment
GDP Gap – Amount actual GDP falls short of potential GDP due to inefficiency
Inflation – Rise in general level of prices
Deflation – Decrease in general level of prices
Hyperinflation – Very rapid inflation whose impact on real output and employment is devastating
Demand-Pull Inflation – “Too much money available for prices of what’s available”
Anticipated Inflation – Expected anticipation in which receiver can lessen burden of inflation
Unanticipated Inflation – Inflation whose full extent was not expected
Cost-Push Inflation – Price increases causes quantity of supply to decrease
Nominal Income – Number of dollars received as wages, rent, interest or profits
Real Income – Measure of goods and services nominal income can buy (adjusted for inflation)
Cost-of-Living-Adjustments (COLAs) – Union workers that have this effect in their pay when the CPI rises
Real Interest Rate – Percentage increase in purchasing power that borrower pays lender
Nominal Interest Rate – Percentage increase in money that borrower pays lender
CHAPTER 7
WAYS TO EXAMINE SIZE OF ECONOMY
- GNP: Gross National Product – All goods and services produced by citizens of a country, home and
abroad (only citizenship matters)
- GDP: Gross Domestic Product – All goods and services produced within a country’s borders in a
given year (only geography matters)
NFFIEUS (Net Foreign Factors Income Earned in U.S.) is not counted in GDP
EIGHT THINGS NOT INCLUDED IN GDP
1) Intermediate goods – components of final good made by another firm (this is not vertical
integration)
2) Second-hand sales
3) Financial transactions (but commission for stockbroker is included in GDP)
4) Transfer payments (welfare, unemployment, social security)
5) Unreported legal business activities (unreported tips)
6) Unreported illegal business activities
7) Non-market transactions (work at home or volunteer work)
8) Corporations producing overseas
NATIONAL INCOME ACCOUNTING – looks at the entire nation’s performance in three ways:
- Assess health of economy by comparing levels of production at various intervals
- Track long-run course to check for growth, decay, or if it remained constant
- Formulate policies to safeguard economy’s wealth
EXPENDITURES APPROACH – GDP is sum of all money spent on buying it
C + Ig + G + Xn = GDP
PERSONAL CONSUMPTION – “C” – All expenditures by households on durable and nondurable
goods and services (66% of GDP)
(12%) Durable = cars, computers, appliances
(29%) Nondurable = food
(59%) Services
GROSS PRIVATE DOMESTIC INVESTMENT – “Ig” – all final purchases of capital goods and
construction
- Business fixed investment (tools, machinery, factories)
- Residential fixed investment (construction of housing)
- Inventory investment (change in business inventories)
Business inventories represent:
- a net increase in inventories as investment
- a net decrease in inventories as negative investment (disinvestment) which is
consumption of product that was bought or produced in a certain year
Net investment = initial stock + appreciation
Investment – increase in capital stock
Depreciation – decrease in capital stock (also called “CONSUMPTION)
Net investment – change in capital stock in one year
GOVERNMENT PURCHASES – “G” – all government consumption of goods and services and
investment in social capital (schools, highways)
- Federal government (40%)
- 50 state + 84,000 local governments (60%)
NET EXPORTS – “Xn” – all U.S. exports minus U.S. imports
X – M = Xn
The U.S. currently has a GDP of about $715 trillion (21% of the world’s $70 trillion). The U.S. also
has 25% of global trade, 40% of world stock market and nearly 50% of world’s largest companies.
Our GDP is larger than next five economies combined.
SHORTCOMINGS OF GDP – Does not take into account:
-Non-market transactions
-Leisure time and relaxation
-Improved quality (technology, etc.)
-Underground economy
-Effects on environment
-Composition and distribution of output (who has and controls the wealth)
-Per capita output (how much each person produces)
MASTER FORMULA LIST – CHAPTER 7
GDP = C + Ig + G + Xn
Net investment = initial stock + appreciation
Xn = exports – imports
NDP = GDP – depreciation of fixed capital
NI = NDP – indirect business taxes – NFFIE
Undistributed corporate profits = corporate profits – corporate income taxes – distributed dividends
PI = NI – social security tax – corporate income taxes – undistributed corporate profits + transfer payments
DI = PI – personal income taxes + credit spending
C & S = DI – credit interest payments
CHAPTER 8
NOMINAL GDP – unadjusted for effects of inflation, measured in terms of money value of economy
REAL GDP – “GDP deflator”, is adjusted for effects of inflation, measures value of goods and services
produced
REAL GDP is important for determining overall economic growth or recession
Nominal GDP = units of output x price
Real GDP = (nom GDP)/(price index) x 100
If nominal GDP and real GDP are equivalent, then that is the base year
ECONOMIC GROWTH AND INSTABILITY
U.S. grows healthily by 3% per year, economic growth is real GDP growing over time
Growth is good because scarcity is less of an issue. Sources of growth:
- Increase in resources
- Increase in productivity (health, education)
- Increase in technology
RULE OF 70 (ARITHMETIC OF ECONOMIC GROWTH)
# of years to double GDPr = 70/annual percentage rate of growth
BUSINESS CYCLE (every three months)
PEAK – GDPr reaches max growth
CONTRACTION – GDPr is shrinking in 6 months at least
TROUGH – GDPr reaches minimum
EXPANSION – GDPr increases for at least 6 months
PHASES OF BUSINESS CYCLE
-As economy grows, consumers and producers get “greedy” which eventually leads to inflation and
overproduction
-As prices increase, consumers begin to get “fearful” and spending decreases, leading to recession
-During times of recession, producers get scared and production decreases with lower prices
-Finally consumers respond by increasing spending and consuming resources
CHARACTERISTICS OF EXPANSIONS AND RECESSIONS
EXPANSIONS
1) Less employment
2) Increased GDPr
3) Rapid job growth
4) Increased interest rate
5) Increased prices
6) Fewer social problems
RECESSIONS
1) More unemployment
2) Decreased GDPr
3) Reduced job growth
4) Lower interest rates
5) Decreased prices
6) More social problems
Usually 1/20 workers loses their job so the other 19 are better off
LABOR FORCE – total population age 16 and over working or looking for work
NOT IN LABOR FORCE
Armed forces
Household workers
Students
Retirees
Disabled persons
Institutionalized
Discouraged workers
IN CIVILIAN WORK FORCE
Employees
Self-employed
UNEMPLOYED
New entrants
Re-entrants
Lost job & looking
Quit job & looking
Laid off & looking
4-5% unemployment is really good
Unemployment = unemployed/labor force x 100
TYPES OF UNEMPLOYMENT
- Seasonal – agriculture, construction, tourism, etc. Since there will always be seasonal
unemployment, this is not included in unemployment rate
- Frictional – a temporary type of unemployment. People who get laid off from work, quit work, or
graduated and looking, not included in unemployment rate
- Structural – changes in demand and skills become obsolete. Caused by machines and consumer
tastes. Creative destruction occurs as new jobs replace old ones
- Cyclical – “bad unemployment”, economic downturn causes lay-offs, counts in unemployment rate
as it was affected by economic growth
When number of job seekers is equivalent to job vacancies and there is 0% cyclical unemployment,
then the economy is at NATURAL RATE OF UNEMPLOYMENT (NRU)
HEALTHY NRU = 4 – 5% Seasonal, frictional, structural
HEALTHY FULL EMPLOYMENT (FE) = 94 – 95%
HEALTHY CYCLICAL UNEMPLOYMENT = 0%
NRU, economy is at potential output. If economy fails to provide enough jobs for all who are willing
and able to work, then there is a GDP GAP!
GDP GAP – amount by which actual GDP falls short of potential GDP
OKUN’S LAW
Okun states that such GDP gaps can measure the amount of lost economic production and can be
calculated (Real unemployment = Cyclical)
Every percentage point of cyclical unemployment above the natural rate (4%), the economy loses 2%
in potential wealth (2% increase in GDP gap)
INFLATION AND DEFLATION
INFLATION – a general rise in level of prices
Moderate inflation is about 3% by strong spending and fully employed economy
HYPERINFLATION – (too much inflation), very bad, money is worth much less
HURT BY UNANTICIPATED INFLATION
-those on fixed income (their real income falls)
-those that save money (inflation deteriorates value of savings)
-creditors (inflation deteriorates value of loans to be paid back)
HELPED/UNAFFECTED BY UNANTICIPATED INFLATION
-those on Social Security
-COLA workers
-debtors (borrowers)
If rate of inflation is known, savers can move funds and creditors can avoid effects by charging
enough interest
Real interest rate = nominal interest rate – anticipated inflation
Real income = nominal income / 1.00 + price level index rate
Government uses CONSUMER PRICE INDEX (CPI) to calculate inflation. It is a basket of about 360
goods and services that the average family buys. About 55% of CPI is services.
CPI = rate of inflation
Base year is year 1 and the reference year is the current year
CPI = (current year index –initial year index)/ initial year index x 100
CPI does tend to overstate true changes in cost of living as it does not take into account:
- Change in true quality of living
- Change in consumer purchasing patterns/price change
- Purchase of discount items or retail items
TYPES OF INFLATION
DEMAND-PULL INFLATION – an increase in total spending beyond the full employment output rate
of the economy. “Too many dollars chasing too few goods”
Quantity demanded increases, price level increases, demand shifted right
COST-PUSH INFLATION – an increase in per-unit production cost, which cause higher price levels.
Caused by resource costs (R in RATNEST)
Quantity supplied decreases, price level increases, demand shifts left
MASTER FORMULA LIST – CHAPTER 8
Nominal GDP = units of output x price per unit
Read GDP = (nominal GDP / price index) x 100
# of years to double GDPr = 70/annual percentage rate of growth
Unemployment rate = (unemployed / labor force) x 100
Real interest rate = nominal interest rate – anticipated inflation
Real income = (nominal income / price index) x 100
% change in real income = % change in nominal income - % change in price level
CPI = (current year index –initial year index)/ initial year index x 10