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CHAPTER 8: Measuring the Economy's Performance (8.3 Two main methods…
CHAPTER 8: Measuring the Economy's Performance
8.1:
The Simple Circular Flow
Concept of Circular Flow
In every economic exchange, the seller recieves the exact same amount that the buyer spends
Goods and services flow in one direction, money payments flow in the other
Profits:
The return entrepreneurs receive for the risk they incur when organizing productive activities
Product Markets
Transactions in which households buy goods.
Factor Markets
Transactions in which businesses buy resources.
Total Income
Yearly amount earned by nation's resources (factors of production)
Includes wages, rent, interest payment, & profits received by workers, landowners, capital owners, and entrepreneurs
Final Goods & Services
Goods and services that are at their final stage, will not be turned into other goods/services.
8.2:
National Income Accounting
National Income Accounting
A measurement system used to estimate national income & its components
Gross Domestic Product (GDP)
The total
market value
of all
final goods
produced by
factors of production
located within a nation's borders
Limitations
Excludes nonmarket production
Is not necessarily a good measure of the market
A measure of the value of production and an indicatior of economic activity, not of a nation's overall welfare
Income approach
Measuring GDP by adding up all components of national income (wages, interest, rent, and profits).
Financial Transactions
Securities:
stocks and bonds
Government transfer payments:
social security & unemployment compensation
Private transfer payments:
individual gifts & corporate gifts
Transfer of second-hand goods
do not count as financial transactions
Other excluded transactions
Household production
Legal and illegal undergound transactions
8.3
Two main methods of measuring GDP
Consumption Expidentures
durable consumer goods: goods that last more than 3 years
nondurable consumer goods: goodst aht are used up in 3 years
services: mental or physical help
Gross Private Domestic Investment
fixed investment:
purchases by businesses of newly produced producer durables / capital goods
inventory investment:
changes in stocks of finished goods and goodds in process, as well as changes in raw materials
producer durables / capital goods:
life span of more than 3 years
Government Expidentures
state, local, and federal
Valued at cost
Net Exports
= total exports - total imports
Net Domestic Product (NDP)
NDP = GDP - depreciation
GDP = C + I + G + X
C
= consumption expidentures
I
= investment expidentures
G
= government expidentures
X
= net expidentures
8.5
Distinguishing between nominal & real values
Nominal Values:
measurements n terms of actual market prices at which goods are sold
Real Values:
measurements after adjustments have been made for inflation or changes in price averages between years
Constant Dollars:
Dollars expressed in real purchasing power. Price-corrected GDP = real GDP
Foreign exchange rate
: The price of currency in terms of another