Chapter 7 Economics quiz

Macroeconomics Chapter 7: Measuring the Economy's Performance

• Macroeconomics studies the "big picture" economic issues.
• Governments use past data and models to predict future economic trends.
• The macroeconomy significantly impacts personal and professional lives, particularly related to the stock market.
• The study explores factors like economic wealth disparity between countries and the slow progress of some.
• National income accounting measures national income and its components.
• GDP measures the total market value of all final goods and services produced annually.

Learning Objectives

• Describe economic activity and the circular flow of income and output.
• Explain the measurement of gross domestic product (GDP).
• Explain why GDP is important and how it's used.
• Explain the two methods of calculating GDP: expenditure and income approaches.
• Explain how various subcomponents of GDP are calculated.
• Understand the limitations of GDP.

The Importance of Macroeconomics

• Macroeconomics answers questions about economic growth, such as why some countries are rich and others are poor.
• Understanding how economic factors impact personal and professional lives is key.
• Stock market fluctuations directly reflect macro-economic conditions.

Measuring GDP

• National income accounting estimates national income and its components.
• GDP accounts for the total market value of all final goods and services during a given year.

The Circular Flow of Income and Output

• Businesses produce goods and services utilizing factors of production (like labor, capital, land, and entrepreneurship) from households in factor markets.
• Households receive payment for factors they provide.
• Businesses sell goods and services to households in product markets, generating income for the businesses.
• The total value of output = total income.
• The circular flow of income and output illustrates a continuous flow between businesses and households.
• This circular flow consists of factor markets and product markets.

The Simple Circular flow

• Product markets include all transactions where goods and services are bought and sold.
• Households purchase goods and services in product markets.
• Factor markets include all transactions where factors of production are bought and sold.
• Businesses buy factors of production—labor, capital, land, and entrepreneurship—in factor markets from households.

Key Terms

• Total income is the yearly amount earned by a country's factors of production.
• Total income = Wages + Rents + Interest + Profits
• Factor markets allow businesses to purchase resources from households.
• Product markets allow households to purchase goods and services from businesses.
• GDP can be calculated using the Expenditure Approach.
• Consumption expenditures (C) include expenditures by households on durable, non-durable goods, and services.
• Gross Private Domestic Investment (I) includes additions to productive capacity.
• Government Expenditures (G) include all government purchases of goods and services.
• Net exports (X-M) considers the difference between exports and imports (X - M).
• GDP can also be calculated through the Income Approach.
• This measures the total factor income paid to all households for their contribution to production.
• All income paid to households from their factors of production= Wages + Rents + Interest + Profits
• Intermediate goods are used directly in producing final goods and are not counted in GDP to avoid double-counting

Other Components of GDP

• Net Domestic Product (NDP) is calculated by deducting capital consumption allowance from GDP.
• Capital consumption allowance accounts for the reduction in capital goods’ value due to wear, tear, and obsolescence over a year.
• National Income (NNI).
• NNI is based on NDP less indirect business taxes less subsidies plus net investment income.
• NNI is the income earned by the factors of production.
• Personal Income (PI) is the total amount of income received by households before paying personal income taxes.
• Disposable Personal Income (DPI) is Personal Income minus personal income taxes.
• Personal Saving (S) is the income remaining from disposable income after consumption.

Nominal and Real GDP

• Nominal GDP measures GDP using current prices.
• Real GDP measures GDP using constant prices (to negate inflation).
• The GDP deflator adjusts for changes in prices to allow comparison over time.
• Real GDP growth rate shows the production changes over time

Limitations of GDP

• GDP doesn't account for population size (hence per capita GDP is calculated).
• GDP doesn't consider the distribution of output.
• GDP ignores non-marketed household production (e.g., home-cooked meals).
• GDP excludes underground or informal economic activities.
• GDP doesn't account for leisure time, environmental quality, or health and life expectancy.
• It only reflects market prices of production, not well-being.