National income identities, the circular flow model, and GDP component accounting beyond the AP-level introduction.
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- What are the four main components of GDP under the expenditure approach?
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C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, M is imports- Define Gross Domestic Product (GDP).
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The total market value of all final goods and services produced within a country's borders in a given period- Why are only final goods counted in GDP, not intermediate goods?
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To avoid double counting, since intermediate goods' value is already embedded in the final goods that contain them- What is included in the consumption component (C) of GDP?
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Household spending on nondurable goods, durable goods, and services- What two types of spending comprise investment (I) in GDP?
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Fixed investment (structures, plant, equipment) and inventory investment (changes in business inventories)- What does government spending (G) include in GDP, and what does it exclude?
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Includes purchases of goods and services by federal, state, and local government. Excludes transfer payments.- Why are transfer payments excluded from government spending in GDP?
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They do not represent payment for newly produced goods or services; they only redistribute existing income- In the circular flow, what does (X - M) or net exports represent?
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X is exports, goods and services produced domestically and sold abroad. M is imports, goods and services produced abroad and bought domestically.- Define Gross National Product (GNP).
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The total market value of all final goods and services produced by a nation's residents, whether at home or abroad- What is the fundamental difference between GDP and GNP?
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GDP measures production within a country's borders. GNP measures production by that country's residents regardless of location.- Define Net Domestic Product (NDP).
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GDP minus depreciation of capital stock, representing output available for consumption and net investment after replacing worn-out capital- What is the formula for National Income?
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NI = NDP - indirect taxes + subsidies, or equivalently, the sum of all factor incomes earned in production- What are the five income components that comprise National Income?
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Compensation of employees, proprietors' income, corporate profits, rental income, and net interest- What is the relationship between GDP and National Income at the accounting level?
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GDP equals National Income plus depreciation plus indirect taxes minus subsidies (or adjusted for these items)- Describe the basic circular flow model.
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Households supply factors of production (labor) and receive income; businesses demand factors and produce goods; households consume those goods, completing the circle
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