Gross Domestic Product Key Concepts Summary ©2005 South-Western College Publishing

What is this chapter about? Discusses the nuts and bolts of national income accounting. National income accounting is the system used to measure the aggregate income and expenditures for a nation.

Who was Simon Kuznets? He explained the first national accounting system

What is gross domestic product? GDP is the most widely reported measure of a nation’s economic performance

What does GDP measure? The market value of all final goods and services produced in a nation during a period of time, usually a year

What is gross national product (GNP)? GNP measures the market value of all final goods and services produced by a nation’s residents, no matter where they are located

What is an advantage of using GDP? GDP measures value using dollars, rather than a list of the number of goods and services

Does GDP measure secondhand transactions? No, Current GDP does not include the sale of a used car or the sale of a home constructed some years ago

What are intermediate goods? Goods and services used as inputs for production of final goods

Does GDP count intermediate goods? No, to avoid double counting, GDP only measures final goods and services

What are final goods? Finished goods and services produced for the ultimate user

Does GDP measure nonproductive financial transactions? No, GDP does not count purely private or public financial transactions such as giving gifts, stocks, bonds, or transfer payments

What is a transfer payment? A government payment to individuals, not in exchange for goods or services currently produced

Does GDP measure the whole economy? Yes, GDP consists of many puzzle pieces to fit together, including markets for products, resources, consumers, workers, and businesses

What is a circular flow model? A model that show us how all the pieces of the puzzle fit together

Basic Circular Flow Model Product markets Supply Goods & Services Demand Spending Basic Circular Flow Model Businesses Households Demand Factor Payments Factor markets Supply Factors of Production

What is a flow? A rate of change in a quantity during a given time period

What is a stock? A quantity measured at one point in time

What additional sectors does a complex circular flow model contain? Financial markets Government Foreign markets

What leakages are present in the more complex model? Household saving Household taxes paid Income spent on imports

What injections are present in the more complex model? Business spending Government spending Foreign spending

What point is the economy tending toward? Where the dollar value of leakages equals the dollar value of injections

What are the two approaches we use to measure GDP? Expenditure Income

What is the expenditure approach? The national income accounting method that measures GDP by adding all the spending for final goods and services

What are the four sectors of GDP? Consumption Investment Government Foreign (X - M)

GDP = C + I + G + (X - M)

What is the income approach? The method that measures GDP by adding all incomes

What are the Income components of GDP? GDP = Compensation of employees + rents + profits + net interest + nonincome adjustments

What are nonincome adjustments? Capital consumption allowances Indirect business taxes

What is compensation of employees? Income earned from wages, salaries, and certain supplements paid to labor

What is rental income of persons? Rent and royalties received by property owners who permit others to use their assets

What are profits? Proprietors income Corporate profits

What is net interest? Interest earned from loans to businesses

What is depreciation? An allowance for the capital worn out producing GDP

What are indirect business taxes? Taxes levied as a percentage of the prices of goods sold and therefore become a part of the revenue received by firms

What are shortcomings of GDP? Nonmarket transactions Distribution, kind, & quality of products Neglect of leisure time Underground economy Economic bads

What other national accounts measure economic performance? Net National Product National Income Personal Income Disposable Personal Income Nominal and Real GDP GDP Chain Price Index

What is Net Domestic Product? NDP is GDP minus depreciation of the capital worn out in producing output

What is national income? NI is the total earned by resource owners, including wages, rents, interest, and profits

What is personal income? PI is the total income received by households that is available for consumption, saving, and payment of personal taxes

What is disposable personal income? DI is the amount of income that households have to spend or save after payment of personal taxes

What is nominal GDP? The value of all final goods based on the prices existing during the time period of production

What is real GDP? The value of all final goods produced during a given time period based on the prices existing in a selected base year

nominal GDP x 100 GDP price index Real GDP =

What is the chain price index? A measure that compares changes in the prices of all final goods during a given period to the prices of those goods in a base year

Key Concepts

Who was Simon Kuznets? What is Gross Domestic Product? What does GDP measure? What is an advantage of using GDP? Does GDP measure the whole economy? What are the two approaches we use to measure GDP? What is the expenditure approach?

What are the four sectors of GDP? What is the income approach? What are the income components of GDP? What are nonincome adjustments? What are shortcomings of GDP? What is Net Domestic Product? What is national income?

What is personal income? What is disposable personal income? What is nominal GDP? What is real GDP? What is the chain price index?

Summary

GDP is the most widely used measure of a nation’s economic performance GDP is the most widely used measure of a nation’s economic performance. GDP is the market value of all final goods produced in the U.S. during a period of time regardless of who owns the factors of production.

GNP is the market value of final goods and services produced by U. S GNP is the market value of final goods and services produced by U.S. residents, no matter where they are located.

The circular flow model is a diagram representing the flow of products and resources between businesses and households in exchange for money payments.

Flows must be distinguished from stocks Flows must be distinguished from stocks. Flows are measured in units per time period, for example, dollars per year. Stocks are quantities that exist at a given point in time measured in dollars.

Basic Circular Flow Model Product markets Supply Goods & Services Demand Spending Basic Circular Flow Model Businesses Households Demand Factor Payments Factor markets Supply Factors of Production

The expenditure approach sums the four major spending components of GDP: consumption, investment, government, and net exports.

The income approach sums the major income components of GDP, consisting of compensation of employees, rents, profits net interest and nonincome expenses for depreciation and indirect business taxes.

Net domestic product (NDP) is GDP minus depreciation

National income (NI) is total income earned by households and is calculated as NDP minus indirect business taxes.

Personal income (PI) is the total income received by households and is calculated as NI minus corporate taxes and Social Security taxes plus transfer payments, net interest, and dividends.

Disposable personal income (DI) is personal income minus personal taxes. DI is the amount of income a household has available to consume or save.

Nominal GDP measures all final goods and services produced in a given time period of production.

Real GDP measures all final goods and services produced in a given time period, valued at the prices existing in a base year.

The GDP chain price index is a broad price index used to convert nominal GDP to real GDP.

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