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

2. 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.

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

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

5. 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

6. 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

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

8. 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

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

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

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

12. 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

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

14. 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

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

16. 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

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

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

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

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

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

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

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

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

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

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

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

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

29. What are nonincome adjustments?
Capital consumption allowances
Indirect business taxes

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

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

32. What are profits?
Proprietors income
Corporate profits

33. What is net interest?
Interest earned from loans to businesses

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

35. 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

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

37. 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

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

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

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

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

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

43. 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

44. nominal GDP x 100
GDP price index
Real GDP =

45. 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

46. Key Concepts

47. 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?

48. 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?

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

50. Summary

51. 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.

52. 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.

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

54. 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.

55. 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

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

57. 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.

58. Net domestic product (NDP) is GDP minus depreciation

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

60. 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.

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

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

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

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

65. END