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Economic - Review 2

Economic - Review 2 - Chapter 8 What does the circular flow...

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Chapter 8 What does the circular flow explain? What is the relationship between businesses and households. 1. In every economic exchange, the seller receives exactly the same amount that the buyer spends 2. Goods and services flow in one direction and money payment flow in the other It is assumed that: Business sell their entire output immediately to households, and households spend their entire income immediately on consumer products. Household receive their income by selling the use of whatever factors of production they own, such as labor services. Distinguish between final and intermediate goods. Final goods/services: Goods or services that are at their final stage of production and will not be transformed into yet other goods or services. Intermediate goods: Goods used up entirely in the production of final goods. Ex. Grain may be a farmer’s final good, but it is not the final good of the nation. Bread is a final good. How does the “value added” approach calculate the value of the goods produced? The dollar value of an industry’s sales minus the value of intermediate goods (ex. raw materials and parts) used in production Check on page 189 which financial transactions are not included in the GDP. Why? 1. Securities There was a transfer of ownership rights. Nothing was produced during the transaction . 2. Government Transfer Payments Payments for which no services are concurrently provided in exchange. 3. Private Transfer Payments Transfer of funds from one individual to another. Check the videotaped lecture and discuss what is not reflected by the GDP figures., that would be the limitations of using GDP as a measure of national welfare. How do the two methods of measuring GDP differ? What would you add to express GDP from the incomes approach? How about the expenditure approach? 1. Deriving GDP by Expenditure Approach Look at separate components of expenditures and add them together: - Consumption expenditure (Durable & non-durable consumer goods, services) - Gross Private Domestic Investment (Creation of capital goods allowing greater production & consumption in the future) - Government Expenditure (Government buys goods & services from private firms and pay wages and salaries to government employees) - Net exports (Total Exports – Total Imports)
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Presenting the Expenditure Approach GDP = C + I + G + X GDP = Consumption expenditure + Investment exp. + Gov Exp. + Net Exports 2. Deriving GDP by the Income Approach Look at total factor payments – or income. Calculate Gross Domestic Income (GDI) - Wages (Salaries & other forms of labor income) - Interest - Rent (All income earned by individuals for the use of their real assets) - Profits (Income earned from the operation of unincorporated business) How do you arrive at NDP? National Income (NI)? Personal income (PI)? Disposable income? How could you have PI larger than NI? How could this happen? Net Domestic Product
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Economic - Review 2 - Chapter 8 What does the circular flow...

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