Key Concepts

A good meant for final use that will not pass through any further stage of production or transformation. Once sold, it passes out of the active economic flow. Whether a good is 'final' depends not on its physical nature but on the economic nature of its use — tea leaves sold to a consumer are a final good, but …

Final goods — such as food and clothing, and services like recreation — that are consumed by their ultimate purchasers to satisfy wants. Also called consumer goods. They …

Consumption goods that, although bought for ultimate use, are durable: they are not used up in a short period, have a relatively long life, and, like machines, undergo wear and tear and need repair and replacement. Examples are televi …

Durable final goods — tools, implements and machines — used in the production of other goods without themselves being transformed in the process. They form part of an economy's capital, enable production to continue over repeated cy …

Goods used up as raw material or inputs in the production of other goods within the same year, such as steel sheets for automobiles or copper for utensils. They are not final goods, and their value is not counted separately (to avoid double counting) because it is a …

A variable defined at a particular point of time — for example, the quantity of capital (machines and buildings) an economy possesses on a given date. The amount of water in a tank at a moment …

A variable defined over a period of time, such as income, output or profit measured per year; such quantities are meaningless unless a time period is specified. The water flowing into a tank per minute is a flow, and a change …

That part of an economy's final output which consists of capital goods produced during the year — machines, tools, buildings and infrastructure such as roads and bridges. It covers both additions to the capital stock and the capita …

The net addition to an economy's capital stock in a year, also called new capital formation. It equals gross investment minus depreciation: Net Investment = Gro …

The deduction made from gross investment to allow for the regular wear and tear of capital during the year. It is an accounting allowance — the value of a capital good spread over its expected life (for example, one-twentieth of a machine's value each year for a 20-year m …

The remuneration paid for the contribution of human labour to production; the income earned by labour as a f …

The remuneration paid for the contribution of capital to production; the income earned by the owners of capital for the use of …

The remuneration of entrepreneurship — the part of a firm's revenue that remains after wages, interest and rent have been paid to the other factors of production. It is the reward for organ …

The remuneration paid for the contribution of land — the fixed natural resources used in production; the income earned …

The continuous, year-after-year movement of aggregate income through the sectors of the economy. Firms pay factor incomes to households for their services, and households spend that income on the firms' goods and services, which returns to firms as sales revenue — so the same aggregate va …

The method that estimates national income by summing the value added (value of output minus value of intermediate goods used) of all the firms in the economy, thereby avoiding double counting. In the circular flow it measures …

The method that estimates national income from the demand side, by adding up all final expenditures received by firms — consumption (C), investment (I), government spending (G) and net exports (X - M): GDP is identical to C + I + G + X - M. It measur …

The method that estimates national income by summing all factor payments — wages, profits, interest and rent — received by households for their contribution to production: GDP is identical to W + P + In + R. It measures the flo …

A simplified description of the functioning of an imaginary economy, built to highlight the essential features of an economic system rather than capture every detail — for example, the simple-economy model that assumes no savi …

A resource that a firm hires and uses up in the process of production. When a good is used in further production rather than final use, it serves as an input …

The net contribution made by a firm — the value of its output minus the value of the intermediate goods it buys from other firms. It is distributed among the firm's four factors of production as wages, interest, prof …

The stock of unsold finished goods, semi-finished goods or raw materials that a firm carries from one year to the next. Inventories are a stock variable and are treated as part of the firm's capital, so a …

A change in a firm's inventories that the firm intended — for example, deliberately producing extra output to raise its stock of unsold goods, or producing less to run its st …

A change in inventories the firm did not intend, caused by unexpected movements in sales. An unexpected fall in sales leaves the firm with unplanned accumulation of stock; an unexpected rise in s …

The aggregate market value of all final goods and services produced within the domestic territory of a country in a year. It can be measured equivalently by the product, …

Gross Domestic Product less depreciation — the value of final output produced within the domestic territory after allowing for the wear and tear o …

GDP plus net factor income from abroad — that is, GDP adjusted for the factor income a country's residents earn abroad, less the factor income foreigners earn within the domestic economy: GNP is identical to …

Gross National Product less depreciation: NNP is identical to GNP - Depreciation. It is measured at market prices, which i …

NNP at market prices minus net indirect taxes (indirect taxes minus subsidies). It is the aggregate income that actually accrues to the factors of production, and i …

The part of firms' profits that is retained by the firms and not distributed among the households. Because it does not accrue to households, it is deducted from National Income w …

The interest that households pay to firms and the government (on money they had borrowed), net of the interest they receive. This net amount is deducted from National Income …

The tax imposed on the profits earned by firms. Since it accrues to the government and not to households, it is deducted from National Income when …

Payments such as pensions, scholarships and prizes that households receive without providing a corresponding factor service. As they add to household income, they are added wh …

The part of National Income actually received by households: PI is identical to NI - Undistributed profits - Net interest payments made by households - Corporate tax + Transfer payments to the house …

Direct taxes households pay out of their Personal Income, such as income tax. They are deducted from Personal Income to obtain Per …

Compulsory payments households make to the government other than taxes, such as fines. Along with personal taxes, they are deducted from Personal Income to arrive a …

The income that finally remains with households to spend or save: PDI is identical to Personal Income - Personal tax paymen …

Net National Product at market prices plus other current transfers from the rest of the world. It indicates the maximum value of goods and services the domestic economy …

Income accruing to the private sector: factor income from net domestic product accruing to the private sector, plus national debt interest, net factor income from abroad, current transfers from the government and other ne …

The value of GDP measured at the current prevailing (current-year) prices. Because it can rise merely because prices have risen, it is an unreliable basis for comparing ou …

GDP measured with goods and services valued at a constant (base-year) set of prices. Because prices are held fixed, any change in real GDP reflects a genuine change …

The reference year whose prices are used to value output when computing real GDP and price indices. Comparisons of real magnitudes are made relat …

A price index equal to the ratio of nominal GDP to real GDP (often expressed as a percentage). It shows how the general price level has moved from the base year to the current year and takes into account all goo …

An index of the prices of a fixed basket of commodities bought by a representative consumer, expressed as the current-year cost of the basket as a percentage of its base-year cost. Unlike the GDP deflator, it includes the prices of …

A price index of goods traded in bulk at wholesale (rather than retail) prices — such as raw materials and semi-finished goods not bought by ordinary consumers. In some countries (for example, the USA) the analogous index i …

The benefits or harms a firm or individual causes to others for which no payment is made or penalty borne, and which have no market — such as pollution from an oil refinery harming those who use the river. Because they are unpriced, GDP ignores them, so it may overstate welfare (negative exter …