Economic Principles: GDP, Growth, Fiscal Policy, and Trade
Chapter 8: GDP
GDP (Gross Domestic Product) is the dollar amount of all final goods and services produced within a country’s borders in a year. It is a monetary measure and avoids multiple counting by only including final goods (excluding intermediate goods).
Formula: GDP = C + Ig + G + Xn
- C (Personal Consumer Expenditure): Spending by households on goods and services.
- Ig (Gross Private Domestic Investment): Net private domestic investment plus depreciation.
- G (Government Purchases): Government spending on goods and services.
- Xn (Net Exports): Exports minus imports (International Trade).
Other National Accounts:
- NDP (Net Domestic Product): GDP minus depreciation.
- NI (National Income): NDP minus statistical discrepancy, plus net foreign factor income.
- PI (Personal Income): NI minus (corporate income tax + social security contributions + undistributed corporate profits * taxes on production) plus transfer payments.
- DI (Disposable Income): PI minus personal taxes.
Income = (Compensation of employees + rental income + interest + proprietor’s income + corporate profits + taxes on production/business taxes + depreciation + statistical discrepancy) – net foreign factor income.
Chapter 9: Economic Growth
Economic growth is an increase in the amount of goods and services produced per head of the population over a period of time.
Determinants of Economic Growth:
- Growth in technology.
- Research and development.
- Open economy.
- Innovation and knowledge.
- Importance of human capital.
New Growth Theory: An economic growth theory that posits humans’ desires and unlimited wants foster ever-increasing productivity and economic growth.
Stages of Development:
- Agricultural.
- Manufacturing.
- Shift towards services.
Keys to Economic Development:
- Establishing a system of property rights.
- Developing an educated population.
- Letting “creative destruction” run its course.
- Limiting protectionism.
Chapter 13: Fiscal and Monetary Policy
Fiscal Policy: The means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.
- Discretionary Fiscal Policy: Implies government actions above and beyond existing fiscal policies, often occurring in periods of recession or economic turbulence.
- Expansionary Fiscal Policy: Macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflationary price increases.
- Contractionary Fiscal Policy: Macroeconomic policy that seeks to *contract* the money supply to combat inflation.
Budget Deficit: An indicator of financial health in which expenditures exceed revenue.
Budget Surplus: A period when income or receipts exceed outlays or expenditures.
Automatic Stabilizers: Features of the structure of modern government budgets, particularly income taxes and welfare spending, that act to dampen fluctuations in real GDP.
Crowding Out Effect: Government spending driving down private sector spending.
Supply-Side Economics: A macroeconomic theory that argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services.
The main function of a central bank is to control the nation’s money supply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis.
A debt instrument is a paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with the terms of a contract. Types of debt instruments include notes, bonds, debentures, certificates, mortgages, leases, or other agreements between a lender and a borrower.
Chapter 15: Money and the Federal Reserve
Money serves as a medium of exchange, a store of value, and a unit of account.
- Medium of Exchange: Money’s most important function is as a medium of exchange to facilitate transactions.
- Store of Value: In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value.
M2 is a measure of the money supply that includes all elements of M1 as well as “near money.”
The Federal Reserve System has a two-part structure: a central authority called the Board of Governors in Washington, D.C., and a decentralized network of 12 Federal Reserve Banks located throughout the country.
Functions of the Federal Reserve System:
- Clearing checks.
- Acting as the federal government’s fiscal agent.
- Supervising member banks.
- Regulating the money supply.
- Setting reserve requirements.
- Supplying paper currency.
Chapter 32: International Trade
International trade is the exchange of services, goods, and capital among various countries and regions, without much hindrance. International trade accounts for a good part of a country’s gross domestic product. It is also one of the important sources of revenue for a developing country.
Trading patterns may show high export sales in the first quarter and high home sales in the third quarter.
Comparative Advantage: The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
Tariffs: Taxes imposed on imported goods and services used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.
Quota: A government-imposed trade restriction that limits the number, or monetary value, of goods that can be imported or exported during a particular time period.
A trade deficit occurs when a country does not produce all it needs. Most nations must borrow from foreign states to pay for the imports. A trade deficit also results when domestic companies manufacture in foreign countries.
The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada, and Mexico designed to remove tariff barriers between the three countries.
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
Tradable pollution permits are rights to sell and buy actual or potential pollution in artificially created markets.