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ECO2013 Midterm 2 Study Guide

ECO2013 Midterm 2 Study Guide - C hapter 7 GDP is the...

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Chapter 7 GDP is the market value of all final goods and services produced within a country during a specific period. Only final goods and services count: if output is to be measured accurately, all goods and services produced during the year must be counted once and only once. Do not count intermediate goods. Only transactions involving production count: GDP is a measure of goods and services “produced.” Financial transaction and income transfers are excluded because they merely move ownership from one part to another; they do not involve current production. Therefore, purchases and sales of stocks, bonds, and U.S. securities are not included in GDP. Only production within the country is counted: It only counts goods and services produced within the country. When foreigners earn income within U.S. borders, it adds to the GDP, but the earnings of Americans abroad do not count toward the U.S. GDP. Only goods produced during the current period are counted: Transactions involving the exchange of goods or assets produced during earlier periods are omitted because they do not reflect current production. Resale of items produced years ago only changes the ownership. (Note: Any commission collected in the processes of these changes in ownership is included in GDP though.) Personal consumption is household spending on consumer goods and services during the current period. Private investment is the flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. Net export is total exports minus total imports. Gross national product is the total market value of all final goods and services produced by the citizens of a country. It is equal to GDP minus the net income of foreigners. Two ways to measure GDP:
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(1) Expenditure approach: Personal consumption (i.e. food, clothing) + Investment (i.e. machinery, houses) + Government consumption (i.e. office supplies, highways) + Net exports. Remember: C + I + G + X. (2) Resource cost-income approach: aggregate income (compensation of employees, income of self-employed proprietors, rents, profits, interest) + nonincome cost items (indirect business taxes, depreciation) + net income of foreigners (income foreigners earn in the U.S. minus the income that Americans earn abroad) Nominal values are values expressed in current dollars, but real values are values that have been adjusted for the effects of inflation. Nominal values may increase as the result of either an expansion in the quantity of goods produced or higher prices. Inflation is an increase in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines when inflation is present. Inflation rate = [(This years PI – Last Years PI)/Last Year’s PI] x100 Consumer price index (CPI) is an indicator of the general level of prices. It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period.
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ECO2013 Midterm 2 Study Guide - C hapter 7 GDP is the...

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