gross domestic product
the total income of everyone in the economy
best single measure of a society's economic well-being; the market value of all final goods and services produced within a country in a given period of time
inflation
rate at which average prices are rising
deflation
rate at which average prices are falling
trade deficit
imbalance of trade between the U.S. and the rest of the world
GDP measures two things
the total income of everyone in the economy and the total expenditure on the economy's output of goods and services and measures the flow of money
example of how for GDP, income equals expenditure
I buy a candy bar for $1 so I lose $1 and Walgreens gains $1. The GDP rises by $1
circular flow chart
goods and services go through markets to households, then factors of production go back to the firm and household spending turns into revenue for a firm which turns into wages/income--this assumes households and firms spend all of their money
What does GDP include?
market value of housing services, final goods, goods and services, no items produced in the past, within country borders
how housing services are part of GDP
rent equals both the tenant's expenditure and the landlord's income
for those that own their home, GDP assumes a person is renting the house to herself
your own produced foods as well as illegal foods are not part of GDP
Canadian citizen working in the U.S. is part of the ___ GDP
U.S.
statistical discrepancy
the difference between the two calculations of GDP
GDP equation
Y=C+I+G+NX
Y=
GDP
C=
Consumption
I=
Investment
G=
Gov't Purchases/ salaries of gov't workers
NX=
Net exports
consumption
spending by households on goods and services with the exception of purchases of new housing (durable, nondurable, and services)
investment
the purchase of goods that will be used in the future to produce more goods and services
sum of purchases of capital equipment, inventories, and structures including expenditure on housing
gov't purchases
spending on goods and services by local, state, and federal gov'ts
salaries of gov't workers and expenditures of public works
transfer payments are different because they include SS and unemployment because they are not made in exchange for a currently pr
net exports
equal the foreign purchases of domestically produced goods (exports)-the domestic purchases of foreign goods (imports)
when buying something abroad,the purchase reduces net exports but because it also raises consumption, investment, or gov't purchases
doe
If total spending rises from one year to the next
the economy is producing a larger output of goods and services or
goods and services are being sold at higher prices
real GDP
the production of goods and services valued at constant prices
evaluate current production using prices that are fixed at past levels; shows how the economy's overall production of goods and services changes over time
not affected by changes in prices,
economic growth is
% change from real GDP
___ GDP is more accurate than ___ GDP
Real; nominal
nominal GDP
the production of goods and services valued at current prices
GDP deflator=
(nominal GDP/real GDP)*100
inflation rate of year 2 of deflator=
[(GDP deflator y2-GDP deflator year 1)/GDP deflator in y1]*100
recession
when about there are two consecutive periods of falling GDP
includes economic distress: rising unemployment, falling profits, increased bankruptcies
low GDP=
higher infant mortality, low birth weight, higher rates of maternal mortality, higher rates of child malnutrition
happiness index
subjective measures of the economy (health, crime, friendliness)
aggregate income=
aggregate expenditure=value of aggregate production
(measured) GDP
the market value of all final goods and services produced within a country in a given time period; doesn't include illegal items
Ideal GDP
perfectly measured GDP=GDP that includes the value of both market and nonmarket final goods and services
inventory exception
when intermediate products becomes final products
Net exports (NX)=
X-IM
GDP doesn't include
value of leisure, nonmarket goods, environmental quality, income inequality
potential GDP
estimate of what GDP would have been if all factors of production (L, K) been used at their "normal" rates
exponential growth
Y=(1+r)^t then use log equation
paying taxes does or does not affect GDP
does not
If US builds a $10 million plant in China, who's GDP is affected and why?
China's increases by $10 million because it is an investment
why are imports not counted in GDP?
consumption increases but imports decreases the amount in net exports
when actual GDP is lower than potential GDP...
in a slump like the Great Recession
when actual GDP is higher than potential GDP
economy is overheating
frictional unemployment
unemployment will always be around because of people switching jobs or finding one