Firms: It is an organization that produces goods &
services for sale
Household: A person or group of people that share their
phone
Gross Domestic Product (GDP): It is the market value of all
final goods & services produced within a nation in a given year
What isn't Included in GDP
- Intermediate Goods- something that needs
further processing
-
Used or Second-hand Goods- has been counted
before
- Purely Financial Transactions- stocks,
bonds, etc.
-
Illegal Activities- drugs money, etc.
-
Unreported Business Activity- tips
-
Nonmarket Activities/Transactions-
volunteering, babysitting
-
Transfer Payments- scholarships, welfare
payments, social security
What is included in GDP
C- Personal Consumption
Expenditures (65% Americans spend on)
Ig- Gross (Total) Private Domestic
Investment (17%)
-
Factory Equipment Maintenance
-
New Factory Equipment
-
Construction of Housing
-
Unsold Inventory or Products built in a
Year
G- Government Spending (20% of
American economy)
Xn- Net Exports (2%)
(Exports-Imports)
Gross National Product (GNP): Total market value of all
final goods & services by citizens of that country on its land or foreign
land
Two Ways to Calculate GDP
1. Expenditure Approach
- Add up all of the spending on final
goods & services produced in a given year formula:
GDP= C+Ig+G+Xn
“expenditure”- to spend
2. Income Approach
- It adds up all the income that resulted
from selling all final goods & services produced in a given year formula:
W +R +I+ P+ statistical adjustments
W- wages
R- rents
I-
interests
P- profits
Statistical Adjustments
1. Indirect Business Taxes
2. Depreciation AKA Consumption of
Fixed Capital
3. Net Foreign Factor Payment
Compensation of Employees: Wages & salaries, could also include
pensions, insurance, health & welfare
Rents: Income received by property owners
Interest
-Money paid by private businesses
to the suppliers of loans
Corporate Profits
-It is the income of the
corporation’s stockholders Ex. Dividends & corporate income taxes
Proprietor’s Income
-income that comes from
entrepreneurships & partners in a business
Formulas:
-Budget Surplus/Deficit = Gov.
Purchases of Goods & Services + Gov. Transfer Payments – Gov. Tax &
Free Collection
-Trade Surplus/Deficit = Exports –
Imports
National Income =
1. Compensation of Employees + Rents +
Interests + Corporate Profits + Proprietor’s Income
2. GDP – Income Business Taxes – Depreciation
– Net Foreign Factor Payment
Disposable Personal Income = National
Income – Personal Household Taxes + Gov. Transfer Payments
-Net Domestic Product (NDP)= GDP –
Depreciation
Net National Product (NNP)= GDP +
Net Foreign Factor Payment
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Nominal
GDP
|
Real
GDP
|
|
o (price × quantity)
o The value of output produced
in current year prices
o Used to measure an increase
in prices
o Can increase from year to
year if either price or quantity increases
|
o (base yr. price × current yr.
quantity)
o The value of output produced
in constant base year prices
o ADJUSTED for inflation
o Used to measure economic
growth
o Can increase from year to
year only if output increases
|
GDP Deflator:
- It is a price index used to
adjust from nominal to real GDP
Nominal GDP ×100 Nominal
Interest Rate ×100
Real GDP
Real Interest Rate
- In base year, GDP Deflator ALWAYS
equals 100
- For years after the base year,
GDP deflator is greater than 100
- For years before the base year,
GDP deflator is less than 100
Consumer Price Index (CPI):
- Most commonly used measurement of
inflation
- It measures the cost of a market
basket of goods of a typical urban American family
(cost of a market basket of goods
& services in a given year) ×100
(cost of a market basket of goods
in a base year)
Inflation Rate:
New Price Index – Old Price Index/Old
Price Index
Nominal Interest Rate:
-
The percentage increase in money, the borrower must pay a lender for a
loan
- It is NOT adjusted for inflation
Real Interest Rate (RIR):
- The percentage increase in
purchasing power, the borrower must pay the lend for a loan
- It IS adjusted for inflation
Formulas:
RIR= Nominal Interest Rate – Inflation
Nominal Interest Rate= Expected
Interest Rate + Inflation Premium
Hurt by Inflation
§ Savers
§ Lenders/Creditors
§ People who are on a Fixed Income Ex.
Elderly, welfare
Helped by Inflation
§
People who Owe Money Ex. Debtors
C.O.L.A.
o
Cost of living adjustments
o
It is where you get an automatic wage increase when inflation occurs
