Discipline: Economics

Type of Paper: Question-Answer

Academic Level: Undergrad. (yrs 3-4)

Paper Format: APA

Pages: 1 Words: 275


GDP Per Capita
Real GDP / Population

Real GDP is the:
GDP corrected for inflation.
It is what the level of output would be had the prices not changed since the base year.

Nominal GDP
GDP calculated at current prices

Two measures that can be used to calculate GDP
Expenditure Approach: 

calculates GDP by adding up the dollars flowing into the firm from buyers.

Income Approach: calculates GDP by adding up the income earned by the factors of production.

Define GDP

Gross Domestic Product is the total market value of all final goods and services produced within a country in a given period of time.

GDP measures output, not employment, sales, or the nation's welfare.

Intermediate Sales

When a firm buys parts from suppliers, it is called an intermediate sale.

These are not counted in GDP because their value is part of the value of the final sale.

What does GDP NOT Include?

1) Gifts and transfer payments (nothing is produced)
2) Financial transactions like loans (nothing is produced)
3) Secondhand sales (nothing is produced)
4) Production of illegal goods (too difficult to measure)
5) Home–produced goods including homemaker services (too difficult to measure) 6) Underground economy: unreported production (too difficult to measure)

Net Investment=
  1. Net Investment = Gross Investment – Depreciation

What is Net Investment
the change in capital stock.
This is good for economic expansion because it means the economy has more capacity. The production possibility curve shifts out as a result.
But net investment is negative when depreciation is greater than gross investment. In this case, the capital stock shrinks.

Gross Investment
  1. is spending on new equipment. It cannot be negative.

Inventory Investment
  1. is the change in inventories (not the level) and may be positive or negative.

    Inventory Investment is unusual because it does not represent a final sale. It is output that the firm produced during the year that it did not sell by the end of the year. We include inventory investment in GDP because it represents output produced during the year (even though it is not sold).

Residential fixed investments
Is the construction of new housing.
Even if these buildings are built for households, they do not count toward consumption.

What does Investment include
only new goods that firms purchase and keep

What are transfer payments?
money the government gives people.
this is not counted toward GDP

Using the Expenditure ApproachGDP = 
C=Consumption I=Imports G=Government Spending NX=Net Exports

Using the Income Approach GDP=
NI=NNP-Indirect Business Tax

Indirect taxes
sales and exile taxes that occur at the sale of the product, not at the production of the product

Personal Income
Income received by households over a year's time (before deducting taxes)

National Income = 
Income earned

Personal Income = 
Income received

Disposable Income = 
Personal Income - Personal Taxes

Y stands for 

Yd stands for 
Disposable income

S stands for 
saving - the current income we do not spend.

Price Level
the average level of prices

P stands for 
GDP Price Deflator

GDP does not account for 
1.Distribution output 2.Difference in leisure time 3.Difference in environmental quality 4.Difference in political freedom, civil rights, and property rights

Important Equations CH. 5

1. Y = C + I + G + NX

2. Yd = Y–T = C+S

3. Final Sales = Y – Inventory Investment

4. Net Investment = I – Depreciation Net Exports = Exports –   --Imports Growth Rate = 100 Xt - Xt-1

5. GDP Per Capita = Real GDP Population

6. GDP Price Deflator = P = 100 Nominal GDP Real GDP

Price Index
measures the combined prices of a group of products called a market basket

CPI stands for____ and measures____
Consumer price index
level of prices on the bundle of goods and services purchased by the average consumer

Price index is set equal to____ in the base year

PBY Stands for
Price at base year

Figuring CPI

P92=125 / 125 (x 100)


P98=300 / 125 (x 100)


Important Equations CH. 6

Inflation = πt = Pt - Pt-1 / Pt-1

Real Wage Rate = Nominal Wage Rate (CPI/100)

(this formula converts the nominal

wage rate to base year values)

Real Interest Rate = Nominal Interest Rate – Inflation Rate

Doubling Time=
70 / growth rate(%)

What determines productivity

a. increases in the quantity or quality of physical capital available to workers.

b. increases in the worker's talents or abilities (human capital).
c. increases in the quantity of natural resources (renewable and non–renewable). d. increased technological knowledge.

Inputs and Outputs: The Production Function

Y = quantity of output

L = quantity of labor input
K = quantity of physical capital (structures and equipment) H = quantity of human capital
N = quantity of natural resources
A = level of technology

Financial Systems
set of institutions that match one person's savings with another person's investment.
Ex: Banks bring lenders and borrowers together.
Bond Market (debt finance)
money being borrowed by selling bonds. The price of the bond is determined in the market place. This is the amount that the government or firm actually borrows

Stock Market (equity finance)
Firms can raise money by issuing stock.

Capital Gains
the receipt of dividends on stock and/or the price increase of the stock price.

National Savings = 
public savings+ private savings

Future Value N years from today=

Important Equations CH. 8&9



PRESENT VALUE =FutureValue/ (1+ r)n

Natural Rate of Unemployment
The amount of unemployment the economy usually experiences

Cyclical Unemployment
Caused by ups and downs in business activities.

rises and falls as real GDP rises and falls

Counter Cyclical
falls as real GDP rises

almost constant throughout the business cycle

Important Equations CH. 10

Labor Force = Number of Employed + Number of Unemployed

Unemployment Rate = Number Unemployed / Labor force (x 100 )

Labor–Force Participation Rate = Labor Force / Adult Population (x 100)

Money Economy 
money buys goods and services

Barter Economy 
goods and service "buy" goods and services

the cheapest and easiest way to buy things.
Money is most liquid

the government's profit from making fiat money
a dollar costs about .035 dollars to make and lasts 18 months
a gold coin costs about .12 dollars to produce and last about 30 years

Important Formulas Ch. 11

M1 = Narrowly Defined Money Supply =

Currency + Demand Deposits + Traveler's Checks + Other Checkable Deposits

M2 = M1 + Savings Deposits + Small Time Deposits (< $100,000) + Money Market Mutual Funds + a couple of minor things

Reserve Ratio = r = Reserves / Deposits

Money Multiplier = 1/r