Chapter 7 Study LearnSmart

The largest component of national income

Compensation of employees by firms

Imports outside the border of the United States, GDP formula is:

C+Ig+G+Xn-M

The national accounts keep track of:

1. Business investment 2. Sales of producers 3. Spending by consumers and government

Two types of Non-production transactions

1. Financial Transactions 2. Secondhand Sales

Items that comprise national income:

1. Interest 2. Compensation of employees 3. Proprietors' income 4. Taxes on production and imports 5. Rents 6. Corporate profits

What are the two ways to adjust nominal GDP to reflect price changes?

1. Multiply the current year's output by price of the output in the base year. 2. Nominal GDP divided by the price index

For the purpose of GDP accounting, government purchases include

1. The purchase of new military equipment 2. Spending on highway construction

A price index

1. always includes a base year. 2. measures the cost of purchasing a market basket of output across different years. 3. is normalized to 100 for the base year.

Part of taxes on production and imports

1. customs duties 2. business property taxes 3. license fees 4. excise taxes 5. general sales taxes

Private domestic investment expenditures consist of

1. newly produced housing 2. spending on new plant and equipment 3. any increase in inventories

As a measurement of economic output and the nation's wealth, GDP fails to account for

1. non-market activities 2. the underground economy 3. leisure time 4. improved product quality

Identify the things that would improve society's well-being but that are not measured as part of GDP

1. peaceful relations with other countries 2. better family relationships 3. reduced crime and violence 4. reduction of drug and alcohol abuse

two ways of looking at GDP

1. see how much the final user paid for it. 2. adding up the entire wage, rental, interest, and profit incomes.

As a measurement of economic output and the nation's wealth, GDP fails to account for: (measured with GDP)

1. underground economy 2. improved product quality 3. leisure time 4. non-market activities

If the price of a market basket of goods in year 1 is $10 and $25 in year 3 and the base year is year 1, the price index for year 3 is what?

250

The value of undergroup transactions in the U.S. is approximately what percent of recorded GDP?

8

Why is the value of final goods included in GDP but the value of intermediate goods excluded?

Because the value of final goods already includes the value of all the intermediate goods that were used in producing them.

What type of market transactions are not included in measuring GDP?

Black, Secondhand, and Stock

What letter symbolizes personal consumption expenditures component of GDP?

C

Expenditures within the border of the United States, GDP formula is:

C+Ig+G+Xn+M

Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?

Expenditures Approach

True or False: GDP is a perfect and complete measure of well being?

False

True or False: Intermediate goods are included in the calculation of GDP.

False

True or False: The transfer of claims to existing capital goods creates new capital

False

What includes all federal, state, and local government outlays on final goods?

Government purchases

A nation's _____ reflects the total market value of all final goods and services produced within an economy in a given year

Gross Domestic Product

equation of net investment

Gross investment minus depreciation

What letter symbolizes Gross Private Domestic Investment component of GDP?

Ig

What consists of the money paid by private businesses to the suppliers of loans used to purchase capital?

Interest

Products that are purchased for resale or further processing or manufacturing

Intermediate goods

Crude oil is a(n) ______ good. Gasoline is a(n) ____ good.

Intermediate, final.

What happens to the size of the capital stock when gross investment and depreciation are equal?

It stays the same

What GDP uses current prices?

Nominal

The formula for calculating a price index is:

Price of market basket in a specific year divided by the price of the same market baset in the base year multiplied by 100.

What income is the net income of sole proprietorships, partnerships, and other unincorporated businesses?

Proprietors'

What GDP uses prices adjusted for inflation?

Real

What is the income received by households and businesses that supply property resources?

Rent

True or False: GDP is a monetary measure

True

True or False: Residential construction is a gross private domestic investment?

True

The market value of a firm's output less the value of the inputs the firm has bought from others

Value Added

Personal Consumption Expenditures cover

all expenditures by households on goods and services.

Aggregate output

annual total output of goods and services

Aggregate output is the primary measure of the economy's

annual total output of goods and services

The chain type of The real-world, more complex GDP price index used in the United States is

annual weighted price index

Final goods are products that

are purchased by their end users.

Why do the accountants regard residential construction as investment rather than consumption?

because apartment buildings and houses, like factories and stores, earn income when they are rented or leased.

All new ouput that is not consumed is

capital

Real GDP, or adjusted GDP reflects

changes in the price level.

Secondhand sales are excluded from the calculation of GDP because they do not

contribute to current production

National income is the sum of compensation of employees, rents, interest, proprietors' income, taxes on production and imports, and:

corporate profits

Retained earnings are a category of

corporate profits

in order to avoid problems created by using money values to measure GDP, when prices rise GDP should be ____ and when prices fall GDP should be _____

decreased; increased

Gross rental income minus ____ equals net rent

depreciation

The annual amount allocated to wear and tear on private investment is called

depreciation

One of the shortcomings of GDP is that it doesn't reveal anything about

distribution of output

The after-tax profits that are distributed to stockholders are called

dividends

net exports include goods produced

domestically that are sold abroad, less goods that are produced abroad that are sold domestically.

we can view GDP in terms of the income derived or created from producing it as the

earning or allocations approach a.k.a. income approach

The effects of negative by-products reduce social and _____ well-being

economic.

National income accounting measures the overall performance of the

economy

wages and salaries piad buy businesses and government to their workers are called

employee compensation

Goods that are produced in a particular period but NOT sold in that period

end up in inventories and are included in investment

viewing GDP as the sum of all the money spend in buying it is output approach a.k.a.

expenditure approach

The view of GDP as the sum of money spend on buying it is called the

expenditure approach.

The view of GDP as the sum of money spent on buying it is called what?

expenditures

we measure gross domestic product by multiplying the quantities of goods bye their prices because it allows us to

express the values of products in a common unit of measurement

Consumption goods and capital goods and services purchased by their end consumers are

final goods

To avoid counting components each time, GDP includes only

finals goods

All the final purchases of machinery, equipment, and tools by business enterprises, including construction, and changes in inventories make up

groos private domestic investment

Polluted air and water are examples of

gross domestic and negative by products

The dollar value of all final goods and services produced within the borders of a given country during a given period of time is the definition of

gross domestic product

All the final purchases of machinery, equipment, and tools by business enterprises, all construction, and changes in inventories make up what?

gross private domestic investment.

Net exports is exports minus ___

imports

By ignoring the value of leisure time, how does national income accounting affect our well-being?

in understates our well-being.

All residential construction are treated as

income

Viewing GDP in terms of earnings derived or created by producing something is called what?

income approach

Nominal GDP is not an accurate measure of the real level of economic activity in a country because

inflation distorts the real value of all goods and services produced

Including the value of ____ goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.

intermediate

Goods and services that are purchased for resale or for further processing or manufacturing are called

intermediate goods

residential construction is considered a(n) ___ rather than consumption

investment

Primary measure of the economy's performance is

its annual total output of goods and services. a.k.a. aggregate output

A business firm measures

its flows of income and expenditures regularly.

economists compare the __ value of the total output in various years, rather than __ volumes of production

market; actual

Multiple counting can be avoided by

measure and cumulating only the value added.

Income earned through the use of American-owned resources for services and production is called

national income

What are factors added to or subtracted from national income to balance the accounting statement of GDP?

net foreign factor income statistical discrepancy consumption of fixed capital

Gross investment minus depreciation is equal to

net investment

GDP calculated using current prices is called

nominal GDP

The formula for real GDP is:

nominal GDP divided by price index (in hundredths)

What are the three categories of personal consumption expenditures?

nondurable goods durable goods services

transfer payments are excluded from government purchases in GDP accounting because

nothing is being produced in return for the payment

To measure aggregate output accurately, all goods produced in a particular year must be counted

once and only once.

What we call "consumption expenditures by households," the national-income accountants call

personal consumption expenditure.

The term that covers all expenditures by households is

personal consumption expenditures

Payments that transfer funds from one individual to another individual are not connected to any production are called

private transfer

Imports must be subtracted from GDP because they are goods and services ______ the borders of the US.

produced outside

Imports must be subtracted from GDP because they are goods and services ______ the borders of the United States.

produced outside

Exports are included in GDP because the goods and services are

produced within the borders of the United States.

Durable Goods

products that have expected lives of three years or more

nondurable goods

products with less than three years of expected life.

The income received by the households and businesses that supply property resources is called

rent

the main reason to participate in the underground economy is to avoid

reporting actual income and paying income taxes

Undistributed corporate profits are called

retained earnings

60% of personal consumption expenditures are on

services

More abundant leisure increases ____, but it ____ real GDP

social welfare; decreases

Gross Domestic Product (GDP) defines aggregate output as

the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.

National income accounting measures

the economy's overall performance

An increase in inventories is an addition to what? What is this define

the stock of capital goods. Investment.

the use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because

the value of money itself changes

Real GDP is gross domestic product measured

to reflect changes in the price level

The market value of a firm's output minus the value of the inputs the firm has bought from others is called

value added

Government transfer payments include all of the following except

wage payments to police officers

Depreciation is the annual amount allocated to

wear and tear on private investment