Chapter 8

Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being?

All of the above

Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?

All of the above: GDP is not adjusted for pollution and it does not account for unequal income distribution. GDP is not adjusted for crime or other social problems. The value of leisure is not included in GDP.

8.3-04a If the base year is the year 2009, then real GDP for 2014 equals $__ and the real GDP for 2015 equals $__.

All of the cotton is used to produce shirts and is therefore considered an intermediate good. Since 2009 is the base year, calculate real GDP for 2014 by multiplying the quantity of each final good in 2014 by the price of the same good in 2009. Sum the values for all final goods.

What are the four major components of expenditures in GDP?

Consumption, Investment, Government Purchases, and Net Exports

What are the four major categories of expenditure?

Consumption, investment, government purchases, and net exports.

Which of the following is a true statement about the impact of World War II on the U.S. economy?

Increased production of tanks, ships, planes, and munitions accounted for most of the increase in GDP.

Suppose a house is built and sold in the year 2006. If the house is resold in the year 2015, is the value of the house included in Gross Domestic Product (GDP) for 2015?

No. GDP for 2015 includes only production that occurs during 2015.

How is the GDP deflator calculated?

GDP deflator = (Nominal GDP / Real GDP) x 100

Why is GDP an imperfect measurement of total production in the economy?

GDP does not include household production or production from the underground economy.

National income is

GDP minus depreciation.

U.S. Gross National Product (GNP) differs from U.S. Gross Domestic Product (GDP) in which of the following ways?

GNP considers production that occurs outside the U.S. GNP is the value of final goods and services produced by residents of the U.S.

real GDP per capita

The level of GDP per person, calculated by dividing the value of a country's real GDP by the country's population.

What are the four categories of income?

Wages, Interest, Rent, and Profit.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?

When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.

Which equation represents the relationship between GDP and the four major expenditure components?

Y = C + I + G + NX

Which of the following equations sums up the components of GDP?

Y = C + I + G + NX

To calculate personal income from national income, which of the following must the BEA do?

add government transfer payments

In an economy with rising prices, compared to the base year,

nominal GDP is larger than real GDP in years after the base year.

Some countries have larger underground economies than do other countries, because

of government policies that are retarding economic growth.

Disposable personal income is equal to

personal income minus personal tax payments.

If the GDP deflator in 2012 has a value of 98.0, then

prices have decreased 2 percent between the base year and 2012.

Total value added is

the difference between the sale price and the price of the intermediate goods used in production.

A more accurate measure of how well a movie has performed at the box office would be

the inflation adjusted dollar value of tickets sold.

Which of the following is included in the economist's definition of investment?

the purchase of new machines, factories, or houses.

Real GDP is

the value of goods and services evaluated at base year prices.

"If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline."

Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.

"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.

Agree. If nominal GDP declined between 2008 and 2009, ten the GDP deflator must also have declined.

Indicate whether you agree or disagree with the following statements. "If nominal GDP is less than real GDP, then the price level must have fallen during the year."

Agree. Nominal GDP will be less than real GDP if the price level falls and is lower than the base year's prices.

In the U.S., gross domestic product (GDP) and gross national product (GNP) are close in value. Under what circumstances would GNP be much larger than GDP?

All of the above would push GNP above GDP. Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S. Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S.

Think about the increase in spending for the Department of Homeland Security and the wars in Afghanistan and Iraq. These all represent government expenditures that have increased GDP yet the typical person might now necessarily be better off as a result. Why?

All of the above: GDP is not adjusted for pollution or other negative effects of production. GDP is not adjusted for crime or other social problems. The value of leisure is not included in GDP. GDP does not account for income distribution.

How does real GDP deal with the problem inflation causes with nominal GDP?

All of the above: Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. Real GDP separates price changes from quantity changes. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced.

Which of the following is true about the consumption component of U.S. GDP in 2012?

Consumer spending on services was greater than the sum of spending on durable and nondurable goods.

When a significant fraction of domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:

GDP will be much larger than GNP.

If Americans still worked 60-hour weeks as they did in 1890,

GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.

How does the size of a country's GDP affect the quality of life of the country's people?

Generally, the more goods and services people have, the better off they are.

All of the following are correct except

Gross domestic income does not include health insurance benefits received by the employees.

GDP is an imperfect measure of economic well-being because it fails to measure what types of production?

Household production and the underground economy.

Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spend on household production. Based on these findings, what can we predict about total production - whether or not that production is included in the calculation of GDP - in the economy when these workers became unemployed?

If the workers had been paying other people to perform the household activities prior to unemployment, then total production will fall.

Indicate whether the following statement is correct or incorrect. "Corporate profits are much too high: Most corporations make profits equal to 50 percent of the products the sell."

Incorrect: The largest component of gross domestic income is wages, which are about three times as large as profit.

According to most economists, is it a serious shortcoming of GDP that it does not count household production or production in the underground economy?

Most economists would answer "no" because these types of production do not affect the most important use of the GDP measure, which is to measure changes in total production over short periods of time.

8.4-02: National income (NI) equals $__billion.

National income (NI) = Net national product (NNP) - Indirect business taxes. NNP = Gross national product (GNP) - Consumption of fixed capital (depreciation) Personal income (PI) = National income (NI) - Corporate earnings + Government transfer payments Disposable personal income = Personal income (PI) - Personal taxes

8.3-04b The (annual) growth rate of real GDP in 2015 is __%.

The growth rate for real GDP in 2015 is the percentage change in real GDP between 2014 and 2015. Percentage change is calculated using the following formula: RGDP(2015) - RGDP(2014) / RGDP(2014) x 100

We often use real GDP per capita as a measure of a country's well-being. Review the definition of real GDP per capita before answering the following question. Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890and the real GDP per capita today understate or overstate the difference in the population's economic well-being?

The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.

An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last year, she purchased $6000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for $900 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of $1100 each.

The total value added of the artist is $3000. 900 x 10 = 9000 9000 - 6000 = 3000

What is the difference between the value of a firm's final product and the value added by the firm to the final product?

The value of a firm's final product is the sale price, value added is the difference between the sale price and the price of intermediate goods.

Real GDP

The value of final goods and services evaluated at base-year prices.

Nominal GDP

The value of final goods and services evaluated at current-year prices.

Would the services of a real estate agent who helped self (or helped buy) the house be included in GDP for 2015?

Yes. GDP for 2015 includes the market value of final goods and services. This includes real estate services.

Is the value of intermediate goods and services produced during the year included in Gross Domestic Product (GDP)? For example, is aluminum used to produce a new mountain bike included in GDP? (Note that this question does not ask whether aluminum is directly counted in GDP but rather whether the production is included in GDP.)

Yes. The value of the aluminum is not directly counted in GDP, but the production of aluminum is included in the value-added method of measuring GDP.

In the circular-flow diagram, who supplies factors of production in exchange for income?

households

The Phillipines and Vietnam have roughly the same size population. Suppose the GDP of the Philippines is $1,000 billion and the GDP of Vietnam is $10,000 billion. You should conclude

it is not possible to make a good comparison of the economic well being of a typical individual in the 2 countries without additional information.

The movie Avatar overtook the Titanic to become the highest-grossing movie of all time. An article on Forbes.com notes that "the average ticket price in 2008 (Avatar was released in 2009) was $7.18, up 56% from prices in 1997 when Titanic was in theaters." The article states that "A look at domestic grosses (box-office receipts) adjusted for inflation shows a more realistic view of Avatar's performance." Adjusting for inflation shows a more realistic view of Avatar's performance at the box office since

it shows the increase in ticket prices in constant dollars.

Personal income is

national income minus retained corporate earnings plus government transfer payments and interest on government bonds.

Disposable personal income is

personal income minus personal taxes.

Over time, prices may change relative to each other. To take this change into account, the Bureau of Economic Analysis calculates

real GDP using chain weights.

According to an article in the Economist, the Russian economy "may not have been booming by 7% a year, as in the mid-2000s, but GDP grew by 3.6% in 2012." These two percentages are referring to changes in

real GDP. These two percentages are referring to changes in real GDP which represents changes in the quantity of goods and services produced in the economy.

Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income? National income will ___. Personal income will ___. Disposable personal income will ___.

remain the same remain the same decrease

Newspapers do not report the number of tickets sold

since the dollar value of tickets sold is a better measure.

In the United States, the difference between GNP and GDP is __ that of many other countries.

smaller than

In calculating GDP, which levels of government spending are included in government purchases?

spending by federal, state, and local governments

Gross domestic product is best defined as

the market value of all final goods and services produced in a country during a period of time, typically one year.

The difference between the price a firm sells a good for and the price the firm paid other firms for intermediate goods is called

value added.

Which component of gross domestic income is the largest?

wages

In 2012, the largest component of gross domestic income was

wages.

The largest component of gross domestic income is

wages.

An important conclusion to draw from the circular-flow diagram is that

we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.

The comparison of the total number of tickets sold by all movies in 1939 with the total number of tickets sold by all movies in 2011

will not be a good way to measure how the relative importance of movies in the economy has changed over time.

Economic historians Roger Ransom and Richard Sutch have estimated that African-American farmers in the U.S. South after the Civil War worked about 30 percent fewer hours per year than they had as slaves before the Civil War. If after the Civil War, African-American farmers had continued to work these additional hours, their production and income would have been higher and so would have been U.S. GDP. The farmers well-being

would not have been higher as a result of working these additional hours because value of an individual's well-being is not included in GDP calculation.

Which of the following is not a shortcoming of GDP as a measure of well-being?

GDP only counts final goods and services and not intermediate goods.

"Whenever real GDP declines, nominal GDP must also decline."

Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

Indicate whether you agree or disagree with the following statement: "In years when people buy few shares of stock, investment will be low and, therefore, so will GDP."

Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.

If you were attempting to forecast the level of consumer spending by households, which measure of total production or total income might be most helpful in making your forecast?

Disposable personal income.

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods.

An underground economy involves all of the following except

buying and selling of goods and services

Buyers and sellers in the underground economy prefer to use cash because

cash leaves little in the way of evidence or a paper trail.

After the Civil War, U.S. GDP

could have been higher if the farmers did not reduce their work hours.

If a country passes a law limiting the number of hours of work per week, GDP would ___ and leisure would ___.

decrease; increase

Which of the following do we subtract from GDP to obtain national income?

depreciation

What happens if we measure GDP by adding up the value of every good and service produced in the economy?

GDP is overestimated because of double counting.

Indicate whether each of the following transations represents the purchase of a final good. 1. The purchase of cotton fabric from a textile mill by a clothing company. 2. The purchase of two new elementary school buildings by the state government. 3. The purchase of French wine by a U.S. consumer. 4. The purchase of a new machine tool by the Ford Motor Company.

1. Is not the purchase of a final product. Steel is an intermediate good used in the production of cars. 2. Is the purchase of a final product. Government purchases of goods and services are considered final goods. 3. Is the purchase of a final good. When U.S. consumers buy French wine, or when French consumers buy domestic wine, they are purchasing a final good. 4. Is the purchase of a final good. When a firm invests in its own future productivity, economists call this "gross domestic private investment," which is considered a final good.

Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value?

E; all of the above. If, in macroeconomics, we measured production using quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by Apple, to gallons of milk, and so on. When we measure total production, we can't just add together the quantities of every good and service because the result would be meaningless. Measuring production using market value in dollar terms allows us to add together many different goods and services.

In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone's income.

Which of the following would be included in the gross national product (GNP) of the United States?

Production from a U.S. firm that operates in Mexico.

Which of the following is true about the government purchases component of U.S. GDP in 2012?

Purchases by state and local governments was greater than purchases by the federal government.

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the present, what would be true of the relationship between nominal GDP and real GDP?

RGDP < NGDP because prices are rising.

According to Dan Sichel, an economist at Wellesley College, the amount of time a singer spends working on a record album in a recording studio is "quite analogous to a factory investing in a new machine." Which of the following statements is correct?

Song development time produces songs, similar to investment in a factory produces physical goods.

Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company. a. You purchase a new Ford Escape Hybrid from a Ford dealer. b. You purchase a 2011 (preowned) Ford Escape Hybrid from a friend. c. Ford purchases door handles for the Escape from an auto parts manufacturer in India. d. Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. e. Ford purchases new machine tools to use in its Missouri Escape factory. f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant.

a. Consumption expenditure b. Not included in GDP calculation. c. Not included because the product is an intermediate good, not a final good. d. Net Export expenditure. e. Investment expenditure. f. Government expenditure.

Indicate whether each of the following is a final good, an intermediate good, or neither. a. Coffee beans purchased by a coffee shop. b. One share of Google stock. c. A new pick-up truck purchased by a consumer. d. A new home purchased by a family.

a. Intermediate good b. Neither c. Final good d. Final good

Which of the following are likely to increase the measured level of GDP and which are likely to reduce it? a. When the number of people working outside the home decreases, the measured level of GDP b. When there is a sharp increase in the crime rate, the measured level of GDP c. If lower tax rates cause fewer people to hide the income they earn, the measured GDP

a. decreases. b. may increase or decrease. c. increases. All things equal, as the government increases taxes, disposable income decreases, which decreases consumption expenditures.

Assuming that inflation has occured over time, what is the relationship between nominal GDP and real GDP in each of the following situations? a. In years after the base year, nominal GDP __ real GDP. b. In the base year, nominal GDP __ real GDP. c. In years prior to the base year, nominal GDP __ real GDP.

a. is greater than b. is equal to c. is less than

Household production and the underground economy

are not accounted for in the Commerce Department's estimates of GDP.

An article in the New York Times describes the much greater use of cash, as opposed to checks and credit cards, in buying and selling in China. The article describes someone bringing several bags of cash containing the equivalent of $130,000 into a car dealership to buy a new BMW. Another article notes: "Many economists believe that the rise in [use of] cash is strongly related to growth in the so-called underground economy." The underground economy is the

buying and selling of goods and services that is concealed from the government.