National Income and Product Accounts (aka. National Accounts)
keep track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other flows of money between different sectors of the economy
Circular-Flow Diagram
represents the transactions in an economy by flows around a circle
Consumer spending
buying goods and services from domestic firms and from firms in the rest of the world
(households engage in this in the markets for goods and services)
Stocks
shares in the ownership of a comany
Bonds
borrowing in the form of an IOU that pays interest
Government Transfers
payments by the government to individuals for which no payment is provided in return
Disposable Income
total income households have left after paying taxes and receiving government transfers
Private Savings
the portion of a household's income that is set aside
(equal to disposable income minus consumer spending)
Financial Markets
a market where individuals, banks, and other institutions buy and sell stocks and bonds as well as make loans
Government Borrowing
additional funds borrowed in the financial markets by the government
Government Purchases of Goods and Services
total purchases by federal, state, and local governments
(includes everything from military spending on ammunition to your local public school's spending on chalk, erasers, and teacher salaries)
Exports
goods and services sold to other countries
Imports
goods and services bought from other countries
Inventories
stocks of goods and raw materials that firms hold to facilitate their operations
Investment Spending
spending on productive physical capital, such as machinery and construction of buildings, and on changes in inventories
Final Goods And Services
goods and services sold to the final, or end user
Intermediate Goods and Services
goods and services that are inputs for production of final goods and services
(the purchaser is another firm, not the final user)
Gross Domestic Product (GDP)
the total value of all final goods and services produced in an economy during a given period, usually a year
Aggregate Spending
the total flow of funds into the markets for goods and services on domestically produced final goods and services
Ways to Calculate GDP
1. add up the total value of all final goods and services produced
2. add up spending on all domestically produced goods and services
3. adding the total factor income earned by households in the economy
Value Added
the difference between the value of its sales and the value of the intermediate goods and services it purchases from other businesses
Included in GDP
all domestically produced final goods and services, including capital goods, new construction of structures, and changes to inventories
Not Included in GDP
- intermediate goods and services
- inputs
- used goods
- financial assets like stocks and bonds
- foreign-produced goods and services
GDP equation
GDP = C + I + G + X - M
Net Exports
the difference between the value of exports and the value of imports
Aggregate Output
the total quantity of final goods and services the economy produces
Real GDP
the total value of final goods and services produced in the economy during a year, calculated as if prices had stayed constant at the level of some given base year
(a real GDP number always comes with information about what the base year is)
Nominal GDP
GDP at current prices
Chained Dollars
the average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year
GDP Per Capita
GDP divided by the size of the population, equivalent to the average GDP per person
Aggregate Price Level
a single number representing the overall level of prices in an economy
Market Basket
a hypothetical consumption bundle, used to measure changes in the overall price level
Price Index
a normalized measure of the overall price level
Price Index Equation for a Given Year
price index in a given year = (cost of market basket in a given year / cost of market basket in base year) * 100
Inflation Rate
the annual percent change in an official price index
Inflation Rate Equation
inflation rate = ((price index in year 2 - price index in year 1) / price index in year 1) * 100
Consumer Price Index (CPI)
the most widely used measure of prices in the United States which is intended to show how the cost of purchases by a typical urban family has changed over time
Producer Price Index (PPI)
measures the cost of a typical basket of goods and services purchased by producers
(contains raw commodities such as steel, electricity, coal, and so on)
(used to be known as the wholesale price index)
GDP Deflator
the ratio of nominal GDP for that year to real GDP for that year
(is equal to 100 in the base year)