National Income and Product Accounts
*keeps track of the flows of money between different parts of the economy
*National income accounting system was developed by Russian economis Simon Kuznets
Taxable Income (Adusted Gross Income)
*includes all income such as wages, salaries, tips, bonuses, etc. minus exemptions, deductions, credits
*Gross income - reductions/exemptions = whats taxable
Tax Exemptions
*allowance for each household member- 3800 per dependant
Tax Deductions
*home mortgage interest payments, business expenses, charitable contributions, medical
*standard deduction; families can take a standard deduction in leiu of itemizing deductions
Tax Credits
*child care, elderly and disabled care, low-income allowance etc.
Gross Domestic Product (GDP)
*market value of all final goods and services produced within a country in a given period of time
*to count in GDP it has to be a market transaction (household duties are not in GDP)
*includes only final goods which embody the value of intermediate goods
Final Goods
*intended for the end user
Intermediate Goods
*goods used as components or ingredients in the production of other goods
*Ford maker buiying tires for car or baker buys ingredients for cake
Currently Produced Goods in GDP
*includes only currently produced goods
*used car transactions are not included in GDP because it was already included the year it was finished
*unsold cars at a dealership is added to their inventory but does not count in GDP because it was already accou
What's included in GDP?
*domestically produced final goods and services
*new construction of structures
*changes to inventories
What's not included in GDP?
*intermediate goods or services
*inputs
*used goods
*financial assets like stocks or bonds
*foreign produced goods or services
Expenditues Approach
*spending on all final goods and services produced in a nation within a year
*add spending on all domestically produced goods and services
*Aggregate expenditure = GDP = C+I+G+(X-M)
Incomes Approach
*earnings by those who produce all output in a nation during a year
*add total factor income earned by households from firms in the economy
*labor (wages including benefits)
*capital (interest or net interesst paid by businesses to households plus net int
GDP Components (C,I,G, and X-M)
*C- consumer expenditures (durable, non-durables, and services)
*I- business investment (business fixed investments like plant, machinery, & equipment), residential constructure and inventories)
*G- government purchases (federal, state, local expenditures
Transfer Payments from Government
*payments by government for which no goods or services are recieved
*social security benefits, unemployment benefits, pensions paid to government workers, welfare payments
Value-Added Approach
*add the toal value of all final goods and services produced
What does GDP tell us?
*measure of the size of the national economy and allows for international comparisons
*not a good measure of economys growth
Injection
*any spending other than by households
*any income other than from resource earnings (investment, government purchases, exports, transfer payments)
Leakage
*any diversion of income from the domestic spending stream
*saving, taxes, imports
Real GDP
*total value of the final goods and services produced in the economy during a given year by using the prices of a selected base year
*measures value of aggregate output in current dollar prices
Nominal GDP
*value of all final goods and services produced in economy calculated by using prices in the year in which the output is produced
*measures aggregate output
Per-Capita GDP
*divided by the population
*used to compare standards of living among nations and to dtermine whether an individual nations standard of living is improving over time
GDP Deflator
*(nominal GDP / real GDP) x 100
*tells how much the prices increased on average
Percent Increase in Real Output
*[(real GDP 2011 - real GDP 2010) / real GDP 2010)] x 100
Gross National Product (GNP)
*income earned by American resources minus depreciation
*total income earned by a nations permanent residents
*differs from GDP because it includes income that US citizens earn abroad and excludes income that foreigners earn here
Net National Product (NNP)
*net income earned by american resources plus or minus adjustment for statistical discrepancy
*total income of a nations residents minus losses for depreciation
*"consumption of fixed capital
National Income (NI)
*income earned by American-owned factors of production plus income received but not earned minus income earned but not received
*total income earned by a nations residents in the production of goods and services
*nationa income is earned as opposed to rec
Personal Income (PI)
*income received by American non-corporate factors of production minus taxes and other non-tax payments to governemnt
*income that households and non-corporate businesses recieve
Disposable Personal Income (DI)
*income households have to either spend or save
*income that households and non-corporate businesses have left after satisfying all their obligations to govenment
*personal income - personal taxes
Inflation
*general rise in prices throughout the economy
Disinflation
*reduction in the rate of inflation
Deflation
*decline in the overall prices throughout the economy
*opposite of inflation
Hyperinflation
*extremely high rate of inflation
*casued usually by excess of government spending over tax revenues followed by government printing money to finance these deficits
Price Index
*measure the average level of prices in an economy and shows how prices, on average, have changed
*base year is the reference period for which the index is 100
Consumer Price Index
*measures the impact of price changes on the cost of a bundle of goods and services pruchased by typical households
*(cost of market basket in given year / cost of market basket in base year) x 100
Producer Price Index
*measure of the average prices received by producers for raw materials, intermediate, and final goods
*used to be called Wholesale Price Index
GDP Deflator
*borader price index than the CPI designed to measure the change in the average price of all the goods and services included in GDP
Rate of Inflation
*[(CPI in year 2 - CPI in year 1) / CPI in year 1] x 100
Nominal Interest Rate
*interest rate expressed in stated terms
Real Interest Rate
*nominal interest rate minus the rate of inflation
Consequences of Inflation
*fixed income receivers are harmed by inflation
*debtors (borrowers) benefit from unanticipated inflation
*lenders (creditors) are harmed by unanticipated inflation
Winners of Inlfation
...
Rule of 72
*tells us how long it takes real GDP per capita, or any other variable to double
*years = 72 / g
Future Value
* FV = PV (1+ r)^n
*n is number of years
*r is interest rate
Factors that Affect Economic Growth
*human capital (knowledge, skills, training)
*private phsycial capital (equipment and structures used to produce goods)
*technology
*public physical capital (dams, roads, bridges, public education)
*natural resources (inputs to production that come from M
How to increase Human Capital
*eduction, knowledge, skills, health
*education
*training
*healthcare and nutrition
*labor force participation
How to increase Stock of Physical Capital
*investment
Productivity
*process that transforms resources into goods and services
*efficient use of resources
*measured as the ratio of a specific measure of output to a specific measure of input
*labor productivity is measured as output per unit of labor
labor prdouctivity inc
Per-Worker Production Function
*describes the relationshiip between the amount of capital per worker in the econmy and average output per worker
Investment from Abraod
*way for a country to invest in new capital
*increases the economys stock of capital
*higher productivity
*higher wages
*state of the art technologies
Investing in Education
*improves human capital
*reduces gap between education and uneducated workers
*conveys positive externalities
*problem for poor countries is that expanding education may lead to brain dead
Sustaniable
*if it can continue in the face of the limited supply of natural resources and the impact of growth on the environment long run economic growth is sustainable
Policies that can Achieve Faster Growth
*stimulate savings
*stimulate research and development
*improve quality of education and healthcare
*develop natural resources by investing in them and developing them in a productive way
*encourage international trade
*promote economic freedom
Costs of Unemployment
*personal costs (loss of paycheck, loss of self esteem, loss of social connections to coworkers, health costs)
*cost on economy is that fewer goods are being produced
Measuring Unemployment
**Housthold Survey
*every month by the Census Bureau
*asks questions that the Bureau of Labor Statistics used to determine unemployment
**Payroll Survey
*provides hight reliable guage of non farm employment
*details graphic information by industry and reg
Employed
*if you have done any work at all for pay or profit during the week of the survery
Unemployed
*if you are actively seeking work in the past 4 weeks but were unsuccessful at finding employment
Underemployed
*workers that are forced to take jobs which do not fully us thier education, background or skills
*work part time when they prefer to work full time
Discouraged Workers
*not considered unemployed because they havn't look for work in the past 4 weeks
Marginally Attached Workers
*special category of discouraged workers and are not considered unemployed
*they would like to be employed and have looked for job in the past year but not past 4 weeks
Labor Force
*equal to the sum of employment and unemployment
Reasons for Unemployment
*wages are artificially set abot the market clearning or equilibrium wage
*economy falls into a recession
*employers are forced to lay off workers
Efficiency Wages
*give employees an incentive to work hard and reduce turnover
*can alos prevent employers from hiring new workers, thus contributing to unemployment
Types of Unemployment
**Frictional
*workers who voluntarily quit to search for better positions
**Structural
*caused by changes in the structure of consumer demands or technology
**Cyclical
*result of business cycle effects (recession)
Natural Rate of Employment
*normal unemployment rate around which the actual unemployment rate fluctuates
*when an economy is only experiencng frictional and structural unemployment
Measures of Labor Force
**Unemployment Rate
unemployed / labor force
**Labor Force Particiaption Rate
labor force / NIWAP
**Employment to Population Ratio
employed / NIWAP
Labor Force Participation Rate
*number in the labor force divided by the adult population
Why is unemployment rate for teenagers higher?
*enter the labor force with little education or job experience
*take unskilled jobs
*first lad off if the ecnomy slows down
*move in and out of the labor force more frequently as they juggle school demands
*often shop around more; quitting one job in sear
Reasons for Natural Rate of Unemployment Increase Over Time
*more woman in labor force
*government policies designed to protect workers incomes
*minimum wage laws
*market power of unions
*efficiency wages
Reasons for Decreased Natural Rate of Unemployment in Recent Years
*people who should be counted as unempoloyed are behind bars
Financial System
*group of institutions in hte ecnomy that help match one persons saving with another persons investment
Financial Markets
*institutions through which savers can directly provide funds to borrowers (bond market, stock market)
Financial Intermediaries
*institutions through which savers can indirectly provide funds to borrowers
*banks take deposits adn pays them interest for these deposits than makes loans and charges interest to brrowers
*mutual funds sell shares to the publc and used the proceeds to b
Bond
*certicifcate issued by large corporations, the federal government, or state and local government to borrow from the public
*face value, coupon rate of interest, date of maturity
*bonds credit risk indicates the probabilit of default
*tax treatment on bon
Stock Market
*share of corporate stock represents owndership in a firm
*stocks are trade on organized stock exchanges
*equity finance is saling stokc to raise money
*stock index is average of a group of stock prices
Budget Surplus
An excess of tax revenue over government spending
Budget Deficit
A shortfall of tax revenue from government spending.
Identity
An equation that is true for every value.
National Saving
*the total income in the economy that remains after paying for consumption and government purchases
*S = Y-C-G
Market for Loanable Funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Government Policies that Affect the Economy Saving and Investment
*saving incentives- increase size of loanable funds
*investment incentives- increase demand for loanable funds
*government budgets deficits and surpluses- deficit decreases size of loanable funds- surplus increases supply of loanable funds
consumption function
The relationship between consumption spending and the level of income.
margincal propensity to consume
*fraction of a chinage in income that is spent on conupmtion
*change in consumption spending / change in income
marginal propensity to save
fraction of a change in inocme that is saved
*change in saving / change in income that caused it
saving function
relationship between saving and the level of income in the economy, other things constant
net wealth
value of a households assets minus its liabilities
investment function
relationship between the amount of businesses plan to invest and level of income in the economy other things constnat
auttonomous
independent, self-governing
net export function
the relationship between net exports and the economy's income, other things constant