UNIT 2 CH. 7 NOTES

gross domestic product (GDP) - total dollar value of all goods and services produced within a country's border within a given year.

gross nation product (GNP) - total value of all final goods and services produced by americans within a year.
EX. an american working in a company located in singapore. his salary is found in the US's GNP and foreign company's GNP.

included in GDP:
C + Ig + G + Xn

C - consumption; 67% of economy; final good or service
Ig - gross domestic private investment; factory equipment maintenance; new factory equipment; construction of housing; unsold inventory: products built in a year.
G - government spending
Xn - net export [export - import]

excluded in GDP:
1. non-market activities: volunteering, family work, illegal drugs.
2. intermediate goods: goods and services purchased for resale on further processing and manufacturing. [avoid double or multiple counting]
3. used or 2nd hand goods
4. financial transactions: stock, bonds, real estate.
5. gifts or transfer payments:

•  private - no output; simple transfer payment one private individual to another. EX. scholarships
• public - nothing to the current porduction. EX. welfare,  social security

expenditures: C + Ig + G + Xn
adds up market value of a single year. 

add up all income earned by households and firms in a year.

GDP = W + R + I + P + Statistical Adjustment

W - wages
R - rent
I - interest
P - profit (proprietor's income)

expenditure approach must equal income approach.
expenditure approach is more reliable.

FORMULAS:
budget: gov. purchases of goods & services + gov. transfer payments - gov. tax & free collection

total # postive - deficit                     total # negative - surplus

trade: export - import
GNP: GDP + net foreign factor payment
NNP (net national product): GNP - depreciation
NDP (net domestic product): GDP - depreciation
national income: GDP - indirect business taxes - depreciation - net foreign factor payment
alternative formula: compensation of employees + rental income + interest income + proprietor's income + corporate profits

disposal personal income: national income - personal household taxes + gov. transfer payment

Ig (gross domestic private investment): net domestic investment - consumption of fixed capital (depreciation)

nominal GDP: value of output produced in current price.
formula: P x Q
can increase from year to year if either output or price increase.

real GDP: value of output produced in constant or base year prices.
formula: P x Q 
can increase from year to year if output increases.
output measured by quantity

real GDP: reason why we take base year is because of inflation count.

price index - measure inflation by tracking changes in the price of a market basket of goods compared with the base year.
formula:                   price of market basket of goods in current year  x 100
                                           price of market basket in base year

market basket of goods - P x Q and total for that year.

GDP deflator - price index used to adjust from nominal to real GDP

• in base year GDP = 100
• years after GDP is great than 100
• years before GDP is less than 100

formula:            nominal GDP  x 100
                             real GDP

inflation formula:              new GDP deflator - old GDP deflator   x 100
                                                           old GDP deflator