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Inflation
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A general and progressive increase in prices.
A decline in the value of money, accompanied by a rise in the prices of goods and services.
A decline in the value of money, accompanied by a rise in the prices of goods and services.
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Factor (input) markets
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Households supply labor to firms. Households are the ultimate owners of firms as well as of all the resources firms use in their production, which we all call capital. Also in factor markets, when households supply labor and capital to firms they are compensated by the firms. They earn wages for their work and they earn interest, dividends and rents on the capital they supply to the firms. The house-holds then use their income to purchase goods and services in the product markets. The firm uses the revenues it receives from the sale of its products to pay for the factors of production (land, labor and capital).
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Capital
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An economic system based on private ownership and on the investment of money in business ventures in order to make a profit. An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.
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Product (output) markets
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All firms sell goods ans services to consumers.
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National Income and Product Accounts
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Data collected and published by the government describing the various components of national income and output in the economy. Method of calculating and keeping track of consumer spending, sales of producers, business investment spending, government purchases, and a variety of other flows of money between different sectors of the economy; also referred to as national accounts.
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Circular flow of production and income
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Firms --> factor market --> households --> product market --> firms
The circular flow shows how the production of goods and services generates income for households and how households purchase goods and services produced by firms.
The circular flow shows how the production of goods and services generates income for households and how households purchase goods and services produced by firms.
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Gross Domestic Product
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GDP.
The dollar value of all final goods, services, and structures produced within a country's national borders during a one- year period. Gross domestic product is the total market value of all the final goods and services produced within an economy in a given year. GDP is also the most common measure of an economy's total output. All the words in the GDP definition are important.
The dollar value of all final goods, services, and structures produced within a country's national borders during a one- year period. Gross domestic product is the total market value of all the final goods and services produced within an economy in a given year. GDP is also the most common measure of an economy's total output. All the words in the GDP definition are important.
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Final good
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Goods that have been purchased for final use and not for resale or further processing or manufacturing. Goods that are sold to ultimate or final purchasers. For example, the two cars that were produced would be final goods if they were sold to households or to a business.
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Intermediate goods
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Products that are purchased for resale or further processing or manufacturing. An example is steel.
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Real GDP
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A measure of GDP that controls for changes in prices.
GDP after adjustments for inflation.
GDP after adjustments for inflation.
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Nominal GDP
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Computed in current dollars - Measures Nominal Value - Change in Price and Quantity. The value of GDP in current dollars.
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Economic Growth
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steady growth in the productive capacity of the economy (and so a growth of national income). Sustained increases in the real GDP of an economy over a long period of time. Decreases in gdp result in great economic disruption as well as lead to unemployment.
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Components of GDP
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Economists divide GDP into four broad categories each corresponding to different types of purchases represented in GDP.
-Consumption expenditures
-Private investment expenditures
-Government purchases
-Net exports
-Consumption expenditures
-Private investment expenditures
-Government purchases
-Net exports
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Consumption Expenditure
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Purchases by consumers.
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Durable goods
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Consumer products that provide benefits over a long period of time, such as cars, furniture, and appliances.
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Services
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An (intangible) act or use for which a consumer, firm, or government is willing to pay.
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Private investment expenditures
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Purchases by firms.
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Gross investment
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The total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period
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Depreciation (capital consumption allowance)
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Reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence; also called capital consumption allowance.
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Net investment
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The gross investment minus depreciation.
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Government purchases
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Purchases by federal, state, and local governments.
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Transfer payments
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Benefits given by the government directly to individuals. Transfer payments may be either cash transfers, such as Social Security payments and retirement payments to former government employees, or in-kind transfers, such as food stamps and low-interest loans for college education.
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Net exports
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Net purchases by the foreign sector (domestic exports minus domestic imports)
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Imports
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Goods produced abroad and sold domestically.
goods produced in foreign states to be sold within the home state.
goods produced in foreign states to be sold within the home state.
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Exports
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Goods and services produced domestically but sold in other countries.
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Trade deficit
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Balance of payments outcome when spending an import exceeds revenues received from exports
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Trade surplus
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A favorable balance of trade; occurs when the value of a country's exports exceeds that of its imports.
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GDP equation
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GDP=C+I+G+X-IM
-Consumption
-Investment
-Government purchases
-Net exports
-Consumption
-Investment
-Government purchases
-Net exports
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National Income
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The total income earned by a nation's residents both domestically and abroad in the production of goods and services.
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Gross national product (GNP)
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The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.
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Net national product (NNP)
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gross national product minus depreciation charges for wear and tear on capital equipment; measure of net annual production generated with labor and property supplied by a country's citizens.
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Personal Income
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National income + transfer payments to households - indirect business taxes - corporate income taxes - undistributed corporate profits
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Personal disposable income
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The available income of a consumer after subtracting mandatory payment of taxes (or adding receipt of government benefits, if applicable)
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Value added
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The gross value of the product minus the costs of raw materials and energy.
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GDP deflator
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A measure of the price level calculated as the ration of the nominal GDP to real GDP times 100
A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
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Chain weighted index
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-A method for calculating changes in prices that uses an average of base years from neighboring years.
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Business cycle
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Alternating periods of economic expansion and economic recession
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Recession
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A period of declining real GDP, accompanied by lower real income and higher unemployment.
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Peak
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the height of an economic expansion, when real GDP stops rising
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Trough
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Low point of a wave
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Expansion
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A period of economic growth as measured by a rise in real GDP
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Depression
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A long-term economic state characterized by unemployment and low prices and low levels of trade and investment.
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Production and income are key to a country's economic health.
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The circular flow of production and income. The circular flow shows how the production of goods and services generates income for households and how households purchase goods and services produced by firms. We can ask who buys the output that is produced, or we can ask how the income that is created through the production process is divided between workers and investors.
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The real-nominal principle needs to be taken into account when looking at GDP.
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What matters to people is the real value of money or income- its purchasing power- not the face value of money or income. When we use current prices to measure GDP, we are using nominal GDP. Nominal GDP can increase for one of two reasons: either the production of goods and services has increased or the prices of those goods and services have increased.
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The term investment is applied differently when we discuss GDP.
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-Private investment expenditures
First, there is spending on new plants and equipment during the year. If a firm builds a new factory or purchases a new machine, the new factory or machine is included in the year's GDP. Purchasing an existing building or buying a used machine does not count in GDP because the goods were not produced during the current year.
-Gross investment: total new investment expenditures.
-Depreciation- Reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence: also called capital consumption allowance.
-Net investment: Gross investment minus depreciation.
First, there is spending on new plants and equipment during the year. If a firm builds a new factory or purchases a new machine, the new factory or machine is included in the year's GDP. Purchasing an existing building or buying a used machine does not count in GDP because the goods were not produced during the current year.
-Gross investment: total new investment expenditures.
-Depreciation- Reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence: also called capital consumption allowance.
-Net investment: Gross investment minus depreciation.
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The GDP equation is an identity.
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The equation is considered an identity because it is always true no matter what the values of the variables are. In any economy, GDP consists of the sum of its four components.
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Value added impacts GDP.
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The sum of all the income-wages, interest, profits, and rent- generated by an organization. For a firm, we can measure value added by the dollar value of the firm's sales minus the dollar value of the goods and services purchased from other firms. For a firm, we can measure value added by the dollar value of the firm's sales minus the dollar value of the goods and services purchased from other firms. What remains is the sum of all the income - wages, profits, rents and interest- that the firm generates.
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Both the government and foreign sector are involved in the circular glow of goods.
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To understand the role of the foreign sector, we first need to define three terms. Imports are goods and services we buy from other countries. Exports are goods and services made here and sold to other countries. Net exports are total exports minus total imports. In Table 5.1, we see that net exports were negative because our imports exceeded our exports. We subtract purchases of foreign goods by consumers, firms, and the government, when we calculate GDP, because these goods were not produced in the US.
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Recessions are a natural occurrence in the business cycle.
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Commonly defined as six consecutive months of declining real GDP. Economists talk more in terms of quarters of the year-consecutive three month periods- than in terms of months. So they would say that a recession occurs when real GDP falls for two consecutive quarters. The date at which the recession starts- that is, when output starts to decline- is called the PEAK. The date at which it ends- that is, when output starts to decline- is called the trough. After that, the economy enters recovery which is also called expansion.
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GDP is not a perfect measure of a nation's economic health.
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It is our best measure of the value of output produced by an economy. As we have seen, we can use it and related indicators to measure economic growth within a counrty. We can also use GDP to compare the value of output across countries as well. Economists use GDP and related measures to determine if an economy has fallen into a recession or has entered into a depression. But while GDP is a very valuable measure of the health of an economy, it is not a perfect measure.
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NBER's defintion of a recession differs from the US Dept. of Commerce's definition.
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Although we used the common definition of a recession as a period when real GDP falls for six months, in practive, a committee of economists at the National Bureau of Economics Research (NBER), a private research group in Cambridge, Massachusetts, of primarily academic economists, officially proclaims the beginning and end of recessions in the US using a broader set of criteria than just GDP. The NBER's formal definition is "a significant decline in economic activity, spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators." As you can see, it uses a wide variety of indicators to determine whether a recession has occurred and its length.
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