ECN253 Chapter 8 Homework (HW1 EX1)

In a small economy, gross investment in 2012 is $1,500, consumption spending is $6,000 government spending is $1,500, exports are $2,000 and imports are $1,000. What is GDP for this economy in 2012:

$10,000

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

1. GDP is not adjusted for crime or other social problems 2. GDP is not adjusted for pollution and it does not account for unequal income distribution 3. The value of leisure is not included in GDP

Identify whether the following topics belong in microeconomics or​ macroeconomics: 1. How does the price of corn change if the price of wheat increase? 2. Identify the best measurement of total output in the US economy 3. How will an increase in government spending impact the inflation rate? 4. The most efficient market structure is perfect competition

1. Microeconomics 2. Macroeconomics 3. Macroeconomics 4. Microeconomics

GDP Includes only:

1. The market value of final goods 2. current production

Indicate whether each of the following transactions represents the purchase of a FINAL GOOD: 1. The purchase of wheat from a wheat farmer by a bakery 2. The purchase of a new fleet of police cars by the local 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 good 2. is the purchase of a final good 3. is the purchase of a final good 4. is the purchase of a final good

If the GDP deflator rises from 185 to 190, what is the rate of inflation between the two years:

2.7%

A car that is produced in 2012 is not sold until 2013. According to the definition of GDP, in which year's GDP should it be counted:

2012

Which of the following goods is directly counted in GDP: 1. The lettuce that Subway purchases for its sandwiches 2. The bread that Subway purchases for its sandwiches 3. a 12-inch Subway sandwich purchased by a student 4. The plastic bags that Subway purchases to wrap its sandwiches

A 12-inch Subway sandwich purchased by a student

An example of a transfer payment is:

A welfare payment (transfer payments are payments by the government to households for which the government does not receive a new good or service in return)

Durable goods:

BMWs, ipads, etc. (lasts longer)

The Underground Economy:

Buying and selling of goods and services that is concealed from the government to avoid taxes, avoid gov. regulations, because the goods and services are illegal ex. drug sales, prostitution

Consumption spending is​ $4.5 billion, gross private domestic investment is​ $3 billion, and government expenditures are​ $2 billion. If GDP is​ $14 billion, which of the following could be true regarding exports and imports in the​ economy:

Exports are $15 billion, and imports are $10.5 billion

Net Exports (NX):

Exports minus imports

If Gladys sells her 1998 Jeep Cherokee for $3,500 in 2016, the sale of her car contributes $3,500 to 2016 GDP:

False

Which of the following statements is​ true? 1. A decrease in the crime rate increases GDP as people will spend more on security. 2. GDP growth distributes income equally to people in the economy. 3. GDP accounting rules do not adjust for production that pollutes the economy. 4. Household production is counted in GDP as it amounts to real production.

GDP accounting rules do not adjust for production that pollutes the economy

GDP current production:

GDP includes only current production that takes place during the indicated time period example- A car bought in 2013 counts towards 2013's GDP. If you resell it in 2014, it will NOT COUNT AGAIN in 2014. Why? Because it does not generate INCOME to factors of production in 2014 But, the service (or income) of the sales person is counted

Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in​ love, marry, and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on​ GDP:

GDP will decrease

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

Household production and the underground economy

Real GDP vs. Nominal GDP:

If total spending rises from one year to the next, one of these things must be true: 1. the economy is producing a larger output of goods and services OR (2) goods and services are being sold at higher prices OR both

If Toyota builds a factory in the US, the production of this plant goes to:

Japanese GNP and US GDP

If the US BEA added up the values of every good and service sold during a year, would the total be larger or smaller than GDP:

Larger than GDP due to the inclusion of: a. intermediate goods b. used goods or goods produced in earlier years

GDP is measured using:

Market values, not quantities

Value:

Measured in dollar terms (has to be bought or sold in the market) example- Quantity (Q) = 20 cars; Price (P) = $20,000 P*Q= $20,000 * 20 = $400,000

Is the value of a house built in 2000 and resold in 2013 included in the GDP of 2013?

No (not a new production)

Which of the following headlines would be more closely related to what macroeconomists study than what micro economists study:

Real GDP grows by 2.3% in the second quarter

Real vs. Nominal GDP Example:

Separate the impact of change in quantity from changes in price. Base year is randomly chosen (for this year it is year 2009) Let's assume that the current base year is 2009. NGDP(2014) = P(2014) * Q(2014) RGDP(2014) = P(2009) * Q(2014) NGDP(2009)= RGDP(2009) in base year both of the GDPs have the same value because the price in both years are the same

Consumption (C):

Spending by HHs on goods and services, excluding spending on new houses

Government Purchases (G):

Spending by federal, state, and local governments on goods and services, and excludes transfer payments. ex. Teacher's salaries, highways, bridges, etc

Investment:

Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by HHs on new houses

Gross Domestic Product (GDP):

The MARKET VALUE of ALL FINAL GOODS AND SERVICES produced in a COUNTRY during a PERIOD OF TIME, typically one year

Inflation Rate:

The percentage increase in the price level from one year to the next

Given the information above, what can we say has happened in the economy from 2011 to 2012: Nominal GDP in 2011 = $10,000 and in 2012 = $12,000 Real GDP in 2011 = $9,500 and in 2012 = $10,500

The price level has risen

Real GDP:

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

If Ford builds a factory in the UK, the production of this plant goes to:

Unites States GNP and UK GDP

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

Y = C + I + G + NX GDP = Y Consumption = C Investment = I Government Purchases = G Net Exports = NX

Would the services of the real estate agent who helped sell (or buy) the house in 2013 be counted in GDP for 2013:

Yes, it is considered a new service

Which of the following transactions represents the purchase of a final​ good: 1. Delta buys a new Europeanminus−made jetliner. 2. The purchase of coffee beans by Starbucks. 3. Apple computer buys computer processors from Intel. 4. Your father buys a new John Deere riding lawn mower.

Your father buys a new John Deere riding lawn mower

Final good or service:

a good or service purchased by the final user or a good that is not included in production of another good

Intermediate good or service:

a good or service that is an input into another good or service, such as a tire on a truck

Price level:

a measure of the average prices of goods and services in the economy

The GDP Deflator:

a measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

An example of business fixed investment spending is:

a purchase of a computer by an accounting firm

Which of the following are likely to increase measured GDP, and which are likely to reduce it? a. The fraction of women working outside the home increases. b. There is a sharp increase in the crime rate. c. Higher tax rates cause some people to hide more of the income they earn

a. increase GDP b. increase (due to investment in law enforcement) or decrease (due to increase in the underground economy) c. decrease GDP as the underground economy would increase

Business cycle:

alternating periods of economic expansion and economic recession

Changes in business inventories:

are goods that have been produced, but not yet sold

Which of the following is not a durable good:

clothing durable goods = automobile, furniture, refrigerator

What are the four major components of expenditures in GDP?

consumption, investment, government purchases, and net exports

The size of the underground economy would tend to decrease if the government of a country:

decreased government regulations on businesses

The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of the decline in working hours:

decreases U.S. GDP and increases the well-being of a typical working person in the U.S.

Macroeconomics, as opposed to microeconomics, includes the study of what determines the level of:

employment in the economy

Marla is an architect who is designing a home for Chuck. Chuck is paying Marla​ $150 per hour to design his new home. When Chuck and Marla get​ married, Marla continues to work on designing the​ home, but she no longer charges Chuck for her work. As a​ result, GDP​ ________ because​ ________:

falls; Marla's architectural design services are no longer bought by Chuck once they're married

Non-durable Goods:

fireworks, sandals, etc.

Household production

goods and services people produce for themselves ex. mechanic fixes his/her own car, home maker: cleans cooks and takes care of children (not counted in GDP) but if they hire a maid, eat out, and enlists her kids in daycare then (counted as GDP)

Imports:

goods and services produced in foreign countries, but purchased by US firms, HHs and governments

Exports:

goods and services produced in the US, but purchased by foreign firms, HHs, and governments

Services:

heart transplant, back massage at the mall, etc.

Gross domestic product understates the total production of final goods and services because of the omission of:

household production

Assuming that the United States is the domestic​ economy, ________ are goods and services produced by​ ________ and purchased by​ ________:

imports; foreign countries; the United States

Nominal GDP is Equal to real GDP:

in the Base Year, so the value of the GDP price deflator will always be 100 in the base year

GDP is NOT ADJUSTED for changes in crime and other social problems:

increase in crime decreases well being, but it could actually increase production, hense GDP due to increase in employment of police officers, security guards, etc. increase in crime can also increase the underground economy, which in turn decreases GDP Hense, there are opposing forces dur to increase in crime

Legalizing all forms of illegal activity:

increases GDP and reduces the size of the underground economy

Shortcomings of GDP as a measure of well-being:

increases in GDP do lead to increases in the well-being of the population, but GDP is not a perfect measure of well being because a. leisure is NOT included in GDP (increase in hours worked -> increase in production and hence, increase in GDP, but it decreases leisure time which -> decreases well being

A final good is one that:

is purchased by its final user

Microeconomics:

is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Macroeconomics:

is the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth

If GDP calculations included measurements of pollution and environmental​ damage, GDP values would most likely be:

less than their values without these measurements

The difference between microeconomics and macroeconomics is:

microeconomics studies smaller parts of the economy such as markets and​ individuals, while macroeconomics studies the economy as a whole

One major component of GDP that can be negative is:

net exports

Consumption expenditures do NOT include household purchases of:

new houses (the spending by households on new houses is not included in consumption. Instead, spending on new houses is included in the investment category)

If real GDP increases we know for sure that

output has risen

Transfer Payments:

payments by the government to HH for which the government does not receive a new good or service in return (or does not result in immediate production of new goods and services) ex. SS payments to retired and disabled, unemployment insurance payments to unemployed workers

In periods when prices are falling, on average,

real GDP will grow faster than nominal GDP

Residential investment:

spending by HHs on new households

Business fixed investment:

spending by firms on new factories, office buildings, and machinery used to produce other goods

Economic Growth:

the ability of an economy to produce increasing quantities of goods and services

An example of an intermediate good would be:

the bread that goes into a sub sandwich that is sold by Quiznos (an intermediate good or service is a good or service that is an input into another good or service, like a tire on a truck)

Which of the following is counted in GDP? 1. the value of do-it-yourself work 2. the cost of a speed boat purchased by drug smugglers 3. the value of leisure 4. the value of goods and services produced in the underground economy

the cost of a speed boat purchased by drug smugglers

Recession:

the period of a business cycle during which total production and total employment are decreasing

expansion:

the period of a business cycle during which total production and total employment are increasing

Gross domestic product understates the total production of final goods and services because of the omission of:

the underground economy

Gross domestic product understates the total production of final goods and services because of the omission of:

the underground economy

GDP is NOT ADJUSTED for pollution or other negative affects of product:

the value of cigarette production is included in GDP but the cost of lung cancer on smokers is not increase in production leads to increase in GDP, but also leads to increase in pollution which in turn decreases overall health and well-being

Nominal GDP:

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

Gross National Product:

the value of final goods and services produced by residents of the United States, even if the production takes place outside the United States

To avoid Double Counting, we do not include:

the value of intermediate goods or services in calculating GDP Example: paper for a book, cotton for shirt production. Let the price of a book be $150. That price contains several things: a) paper b) labor c) others. We DO NOT include or count the value of paper here, since the price of $150 already captures the value

Gross Domestic Product Measures:

total production

If an increase in crime causes households to spend money on police and security systems, GDP will rise:

true

Nominal GDP is GDP in a given year:

valued in the prices of that year

Real GDP is GDP in a given year:

valued in the prices of the base year

Which of the following are not considered part of government purchases:

welfare benefits