Examples of net present value in the following topics:
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- Benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and costs over time are expressed on a common basis in terms of their net present value.
- For example, it is very difficult to place a dollar value on human life, consumers' time, or environmental impact.
- Calculate the net benefit of the project (total benefit minus total cost).
- Adjust for inflation and apply the discount rate to calculate present value of the project.
- Explain how to determine the net cost/benefit of providing a public good
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- There are a few methods used for calculating GDP, the most commonly presented are the expenditure and the income approach.
- The output approach is also called "net product" or "value added" method.
- Deducting intermediate consumption from gross value to obtain the net value of domestic output.
- Net value added = Gross value of output – Value of intermediate consumption.
- The sum of net value added in various economic activities is known as GDP at factor cost.
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- The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.
- The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future.
- Time value of money: (1 + r)t x (the value of the initial investment) = future value; where r is the annual interest rate and t is the number of years.
- Alternatively, if an investment is valued at $125 and this value includes the 7% return generated over a one year time horizon, the original value of the investment or its present value is equal to (125)/(1.07) or 117.
- Present value: (the value of the investment at a future time)/(1 + r)n; where r is the annual interest rate and n is the number of years the investment has occurred.
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- In order to count a good or service, it is necessary to assign value to it.
- The value that the measures of national income and output assign to a good or service is its market value – the price when bought or sold.
- The actual usefulness of a product (its use-value) is not measured – assuming the use-value to be any different from its market value.
- At factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes
- NDP at factor cost = compensation of employees + net interest + rental and royalty income + profit of incorporated and unincorporated NDP at factor cost
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- Large corporations could not have grown to their present size without being able to find innovative ways to raise capital to finance expansion.
- But others pay little or no dividends, hoping instead to attract shareholders by improving corporate profitability -- and hence, the value of the shares themselves.
- In general, the value of shares increases as investors come to expect corporate earnings to rise.
- Still other corporations, often the smaller ones, prefer to reinvest most or all of their net income in research and expansion, hoping to reward investors by rapidly increasing the value of their shares.
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- Formula: GDP (gross domestic product) at market price = value of output in an economy in the particular year - intermediate consumption at factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes.
- Rental income (mainly for the use of real estate) net of expenses of landlords;
- All remaining value added generated by firms is called the residual or profit or business cash flow.
- Formula: GDI (gross domestic income, which should equate to gross domestic product) = Compensation of employees + Net interest + Rental & royalty income + Business cash flow
- The components of GDP include consumption, investment, government spending, and net exports (exports minus imports).
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- The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period.
- The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period, measured in the currency of that economy.
- It is measured by finding the country's net exports.
- Another equation defining GDP using alternative terms (which in theory results in the same value) is:
- In the U.S., net borrowing has tended to have a direct relationship with net imports.
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- The wealth effect is specifically related to the value of assets; market participants will adjust consumption in-line with their perception of the appreciation or depreciation of held assets (a home; equity investments, etc.).
- Spending = Income – Net Savings = Income + Net Increase in Debt
- In words: what you spend is what you earn, plus what you borrow: if you spend $110 and earned $100, then you must have net borrowed $10; conversely if you spend $90 and earn $100, then you have net savings of $10, or have reduced debt by $10, for net change in debt of –$10.
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- This translates into a net decrease total economic surplus, otherwise known as deadweight loss.
- To obtain the good, the consumer must present the ticket and the money to the vendor when making the purchase.
- If individuals who value the good most are not capable of purchasing it, there is a potential for a higher amount of dead weight loss.
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- Real GDP growth is the value of all goods produced in a given year; nominal GDP is value of all the goods taking price changes into account.
- In economics, a nominal value is expressed in monetary terms.
- For example, a nominal value can change due to shifts in quantity and price.
- Real values measure the purchasing power net of any price changes over time.
- The real GDP determines the purchasing power net of price changes for a given year.