Key Economic Concepts: GDP, GNP, and Market Dynamics
Understanding Key Economic Concepts
Circular Economy Flows
Describe the two flows of the circular economy. The actual flow of goods and services and of factors other than monetary.
GDP vs. Personal Income
Compare GDP to personal income. The GDP is determined by the sum of consumption, investment, public spending, and exports. Personal available income is the sum of income.
GDP vs. GNP
What is the difference between GDP and GNP? GDP is the value of all final goods and services produced in a given country during a period. GNP is the value of all final goods and services produced by a company of the same nationality.
Why Not Count Inputs in GNP?
Why are the purchase and sale of inputs not counted in the GNP? Because this would lead to double counting, since it is included in value added.
Value Added in an Economy
What is the value added of an economy? It’s the difference between the value of goods produced and the cost of raw materials and intermediate goods used to produce it. Its components are: salary, wages, benefits, taxes, and interests.
Price Index
What is a price index? It is a measure of the average variation in prices of a basket of goods.
Identity vs. Function
What is the difference between an identity and a function? An identity is a definition and is not explained. A function explains the behavior of a variable in relation to another.
Depreciation vs. Amortization
What is the difference between depreciation and amortization of capital? Depreciation is an economic concept and takes into account the physical and moral wear, while amortization is a purely accounting concept.
Transfers and Their Costs
What is a transfer, and what are the costs incurred? A transfer is a unilateral flow of resources, a transaction without a counterpart. The costs are related to the estimation of the price of a commodity that is not traded on the market, for which the value is unknown.
Output Gap and Potential Output
What is the output gap, and what is potential output? Potential output is the amount of merchandise (goods or services) that the economy could produce at full employment, given the existing resources. The output gap is the difference between potential output and real output.
Calculating Present Value
How do you calculate the present value? The present value is calculated by dividing the final value of an asset by one plus the interest rate, raised to the number of years.
Production Function in the Classical Model
In the classical model, what is the production function, and what variables can move? It is the relationship between the product and the employee, given the capital and technology.
Money Market Imbalances and Goods Market
What is the relationship between money market imbalances and the market for goods and services? If the amount of money supplied is greater than people want to keep, families and businesses increase their consumption and production. The effect will be a price increase until the money value equals the value of production.
Money as a Veil
Why is it said that money is a veil? Because the increase in supply or demand for money does not affect the equilibrium in the labor market and aggregate supply. The determination of the real balance of money is not required.
Stimulating Production
Explain how to stimulate production in the economy. If you increase the money supply, only prices will increase, but it will not manage to increase production. Increased spending, if production is already at full employment, will only shift demand to businesses and families.
Crowding Out Effect
Explain the crowding-out effect and give an example. It is the inverse effect that the increase of public spending has on private investment.
Keynesian vs. Classical Model
What is the fundamental difference between the Keynesian and the classical model? The essential difference is that in the classical model, full employment is assumed, and aggregate demand and supply are adjusted via prices. In the Keynesian model, full employment is not assumed, and production is determined by demand.