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Econ 2
Chapter 10 Measuring a Nation’s Income
Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
GDP includes all items produced in the economy and sold legally in markets.
GDP also includes the market value of the housing services provided by the economy’s stock of housing.The government includes this owner-occupied housing in GDP by estimating its rental value. The imputed rent is included both in the homeowner’s expenditure and in her income, so it adds to GDP.
GDP excludes most items produced and sold illicitly.
GDP also excludes most items that are produced and consumed at home.
GDP includes only the value of final goods.
When an intermediate good is produced and, rather than being used, is added to a firm’s inventory of goods for use or sale at a later date.
GDP includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).
GDP includes goods and services currently produced. (the value of the used car is not included in GDP)
GDP measures the value of production within the geographic confines of a country.
GDP measures the value of production that takes place within a specific interval of time.
Y = C + I + G + NX
Consumption is spending by households on goods and services, with the exception of purchases of new housing.
Investment is the sum of purchases of capital equipment, inventories, and structures. Investment in structures includes expenditure on new housing.
Government purchases include spending on goods and services by local, state, and federal governments. It includes the salaries of government workers as well as expenditures on public works.
Nominal GDP uses current prices to place a value on the economy’s production of goods and services. Real GDP uses constant base-year prices to place a value on the economy’s production of goods and services.
The GDP deflator is calculated as follows: GDP deflator = Nominal GDP/Real GDP *100
Inflation rate in year 2 = (GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1 *100
Chapter 11 Measuring the Cost of Living
The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer.
CPI = Price of basket of goods and services in current year/Price of basket in base year *100
Producer Price Index (PPI), which measures the cost of a basket of goods and services bought by firms rather than consumers.
Three problems with the index are widely acknowledged but difficult to solve: substitution bias, introduction of new goods, unmeasured quality change.
The formula for turning dollar figures from year into today’s dollars is the following: Amount in today’s dollars = Amount in year T dollars * (Price level today/Price level in year T)
Real interest rate = Nominal interest rate - Inflation rate
Chapter 12 Production and Growth Productivity, the quantity of goods and services produced from each unit of labor input. diminishing returns: the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
A capital investment that is owned and operated by a foreign entity is called foreign direct investment
An investment that is financed with foreign money but operated by domestic residents is called foreign portfolio investment.
Education—investment in human capital—is at least as important as investment in physical capital for a country’s long-run economic success.
The term human capital usually refers to education, but it can also be used to describe another type of investment in people: expenditures that lead to a healthier population.
Another way policymakers can foster economic growth is by protecting property rights and promoting political stability.
13.1 Financial Institutions in the