consumption
spending by household on goods and services, with the exception of purchases of new housing
largest component of expenditures
low variance (smooth over time)
GDP Deflator
measure of economy-wide price (price index)
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
government purchases
spending on goods and services by local, state, and federal governments
excludes transfer payments/taxes because govt isn't buying a good/service
gross domestic product (GDP)
the market value of all final goods and services produced within a country in a given period of time
investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
accounts for 10-15% of expenditures
most volatile component of expenditures - high variance
3 factors:
1) business fixed investment - firm spending on
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports); the value of a nation's exports minus the value of its imports; also called the trade balance
nominal GDP
the production of goods and services valued at current prices
real GDP
the production of goods and services valued at constant prices
Why must an economy's income equal its expenditure?
In every transaction, a dollar spent by a buyer is a dollar earned by a seller.
Which contributes more to GDP -- the production of an economy car or the production of a luxury car? Why?
The production of a luxury car contributes more to GDP because it would require more money and resources to produce compared to those required to produce an economy car.
List the four components of GDP.
1) Consumption (C)
2) Investment (I)
3) Government Purchases (G)
4) Net Exports (NX)
Give an example of each of the four components of GDP.
1) Consumption - me buying Dance Central 3
2) Investment - a company buying more capital (i.e. workers or land)
3) Government Purchases - defense spending
4) Net Exports - soccer balls produced in Mexico and sold in U.S.; keychains produced in U.S. and so
Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
Real GDP shows how the economy's overall production of goods and services changes over time and also measures the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services. Nomi
Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.
GDP (per capita) seems a natural measure of the economic well-being of the average individual -- higher living standards.
Something that could raise GDP and yet be undesirable would be massive increases to production, because that would contribute to wors
final good
a good at the end of the production process that will not be used to produce something else that will then be sold in the market
denoting a good as a final good helps avoid double counting intermediate goods (inputs)
What is not included in GDP?
used goods (not produced in the current year)
financial assets (e.g. stocks, bonds, bank accounts; not goods/services)
in regards to standards of living:
1) value of leisure
2) distribution of income
What are other measures of income?
GNP - gross national product: who produces the goods and services
NNP - net national product: GNP - depreciation (the wearing out of capital we own)
National Income: GNP - business taxes + business subsidies; net taxes = taxes + govt transfer payments
Dis