ECON 2105: CHAPTER 10 [MEASURING A NATION'S INCOME]

"...Of All..."

- GDP includes all items produced and sold legally in the economy. -the value of housing services is somewhat difficult to measure. -GDP doesn't include illegal goods or services/items that aren't sold in markets.

"...Goods and Services..."

- GDP includes both tangible goods and intangible services.

"...Within a Country..."

- GDP measures the production that takes place within the geographical boundaries of a particular country.

"...Produced..."

- only current production is counted - used goods that are sold don't count as part of GDP.

What are the four components of expenditure in GDP?

1. consumption 2. investment 3. government purchases 4. net exports

Net National Product (NNP)

GNP minus losses from depreciation (wear and tear on an economy's stock of equipment and structures).

GDP Deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

GNP ________ income that American citizens earn abroad and _______ income that foreigners earn in the U.S.

a. includes b. excludes

A country reported nominal GDP of $105 billion in 2018 and $85 billion in 2017. It also reported a GDP deflator of 130 in 2018 and 125 in 2017. Between 2017 and 2018, a. real output and the price level both rose. b. real output rose and the price level fell. c. real output fell and the price level rose. d. real output and the price level both fell.

answer: a

Gross domestic product includes all _______ . a. legal final goods and services, but it excludes illegal final goods and services. b. legal and illegal final goods, but it excludes all legal and illegal final services. c. legal and illegal final goods and all legal and illegal final services. d. legal and illegal final goods and legal final services, but it excludes illegal final services.

answer: a

In the GDP accounts production equals a. income. b. income + saving. c. income − government expenditures. d. income − imports.

answer: a

In the simple circular-flow diagram, with households and firms, GDP can be computed as the a. income received by households, in the form of wages, rent and profit. b. income received by households in the form of wages. c. payments made by firms for labor. d. profits received by households.

answer: a

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that __________. a. GDP is not a useful measure of society's welfare. b. GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of government. c. GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare. d. GDP is still the best measure of society's welfare because these other values cannot actually be measured.

answer: c

Disposable personal income is a. the total income earned by a nation's permanent residents. b. the total income earned by a nation's residents in the production of goods and services. c. the income that households and non-corporate businesses receive. d. the income that households and businesses have remaining after satisfying their obligations to the government.

answer: d

If an economy's GDP falls, then it must be the case that the economy's a. income falls and saving rises. b. income and saving both fall. c. income falls and expenditure rises. d. income and expenditure both fall.

answer: d

If net exports is a negative number for a particular year, then a. the value of firms' inventories declined over the course of the year. b. consumption exceeded the sum of investment and government purchases during the year. c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year. d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.

answer: d

If real GDP doubles and the GDP deflator doubles, then nominal GDP a. remains constant. b. doubles. c. triples. d. quadruples.

answer: d

In a simple circular-flow diagram, total income and total expenditure are a. never equal because total income always exceeds total expenditure. b. seldom equal because of the ongoing changes in an economy's unemployment rate. c. equal only when the government purchases no goods or services. d. always equal because every transaction has a buyer and a seller.

answer: d

Statistical Discrepancy

difference between the two calculations of GDP (GDP-GDI)

How does National Income differ from NNP?

excludes indirect business taxes and including business subsidies.

What is the goal of macroeconomics?

explain economic changes that affect many households, firms, and markets simultaneously.

Disposable Personal Income (DPI)

income that households and non-corporate business have left after taxes and other obligations to the government.

Unemployment Rate

percentage of the labor force that's out of work.

Inflation/Deflation

rate at which average prices are rising or falling.

Consumption

spending by households on goods and services, with the exception of purchases of new housing.

Investment

spending on business capital, residential capital, and inventories.

Net Exports

spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports).

Government Purchases

spending on goods and services by local, state, and federal governments.

Gross Domestic Product (GDP)

the market value of all final goods and services produced within a country in a given period of time.

Real GDP

the production of goods and services valued at constant prices

Nominal GDP

the production of goods and services valued at current prices

Macroeconomics

the study of economy-wide phenomena including inflation, unemployment, and economic growth.

Microeconomics

the study of how households and firms make decisions and how they interact in markets.

Gross National Product (GNP)

the total income earned by a nation's permanent residents.

National Income

the total income earned by a nation's residents in the production of goods and services.

What are the two things that GDP measures?

total income and total expenditure

"...FInal..."

- intermediate goods aren't included in GDP. - the value of intermediate goods is already included as part of the value of the final good. - goods placed into inventory are considered to be "final" and included in GDP as firm's inventory investment.

"...In a Given Period of Time."

- the usual interval of time used to measure GDP is a year or a quarter (3 months). - when the government reports GDP, data is reported on an annual basis. -data is generally adjusted for regular seasonal changes.

"GDP is the Market Value..."

- to add together different items, market values are used. - market values are calculated by using market prices.

Which of the following is included in the calculation of GDP? a. The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country. b. The purchase of a new edition of a foreign textbook that was produced in a different nation. c. The purchase of ink and paper supplies by a textbook company for the production of new textbooks. d. The purchase of a used textbook from a friend who took the same class last year.

answer: a

A Georgia household receives a Social Security check for $1500, which it uses to purchase a $40 pair of shoes made in Thailand by a Thai firm, a $1240 television made by a Korean firm in Korea, and $220 on groceries from a local store. As a result, U.S. GDP a. increases by $40. b. increases by $220. c. increases by $280. d. increases by $1500.

answer: b

Aly, a Mexican citizen, works only in the United Kingdom. The value of the output she produces is a. included in both U.K. GDP and U.K. GNP. b. included in U.K. GDP, but it is not included in U.K. GNP. c. included in U.K. GNP, but it is not included in U.K. GDP. d. included in neither U.K. GDP nor U.K. GNP.

answer: b

Because every transaction has a buyer and a seller, a. GDP is more closely associated with an economy's income than it is with an economy's expenditure. b. every transaction contributes equally to an economy's income and to its expenditure. c. the number of firms must be equal to the number of households in a simple circular-flow diagram. d. firms' profits are necessarily zero in a simple circular-flow diagram.

answer: b

Changes in real GDP reflect a. only changes in prices. b. only changes in the amounts being produced. c. both changes in prices and changes in the amounts being produced. d. neither changes in prices nor changes in the amounts being produced.

answer: b

During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person a. grew by more than 12 percent. b. grew, but by less than 12 percent. c. was unchanged. d. decreased.

answer: b

Expenditures on a nation's domestic production a. are less than its domestic production. b. are equal to its domestic production. c. are greater than its domestic production. d. could be less than, equal to, or greater than its domestic production.

answer: b

In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily, a. values of goods and services based on surveys of consumers. b. market prices. c. quantities purchased by a typical urban household. d. profits from producing goods and services.

answer: b

International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with a. longer life expectancy and a lower percentage of the population that is literate. b. longer life expectancy and a higher percentage of the population that is literate. c. very nearly the same life expectancy and a lower percentage of the population that is literate. d. very nearly the same life expectancy and a higher percentage of the population that is literate.

answer: b

Sandria, a U.S. citizen, travels to Jamaica and buys a newly manufactured motorcycle made there. Her purchase is included in a. both Jamaica's GDP and U.S. GDP. b. Jamaica's GDP, but it is not included in U.S. GDP. c. U.S. GDP, but it is not included in Jamaica's GDP. d. neither Jamaica's GDP nor U.S. GDP.

answer: b

Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct? a. GDP would definitely increase, despite the fact that GDP includes leisure. b. GDP would definitely increase because GDP excludes leisure. c. GDP could either increase or decrease because GDP includes leisure. d. GDP could either increase or decrease because GDP excludes leisure.

answer: b

​GDP and GNP are identical when a. exports and imports exactly balance. b. ​all domestic production is by domestically owned producers and no foreign production is carried out by domestic producers. c. ​production by domestic producers in other countries is greater than production by foreign producers domestically. d. ​there are no taxes.

answer: b

A recession has traditionally been defined as a period during which _______. a. nominal GDP declines for two consecutive quarters. b. nominal GDP declines for four consecutive quarters. c. real GDP declines for two consecutive quarters. d. real GDP declines for four consecutive quarters.

answer: c

According to the circular-flow diagram, GDP can be computed as a. either the revenue firms receive from the sales of goods and services or the payments they make to factors of production. b. the revenue firms receive from the sales of goods and services but not as the payments they make to factors of production. c. payments firms make to factors of production but not as revenues they receive from the sales of goods and services. d. neither the revenue firms receive nor the payments they make to factors of production.

answer: c

Countries with low GDP per person tend to have a. lower rates of child malnutrition. b. fewer infants with low birth weight. c. higher rates of infant mortality. d. more access to safe drinking water.

answer: c

For an economy as a whole, a. wages must equal profit. b. consumption must equal income. c. income must equal expenditure. d. consumption must equal saving.

answer: c

For the purpose of calculating GDP, investment is spending on a. stocks, bonds, and other financial assets. b. real estate and financial assets such as stocks and bonds. c. capital equipment, inventories, and structures, including household purchases of new housing. d. capital equipment, inventories, and structures, excluding household purchases of new housing.

answer: c

GDP per person tells us the income and expenditure of the a. richest person in the economy. b. poorest person in the economy. c. average person in the economy. d. entire economy.

answer: c

If in some year nominal GDP was $20 billion and the GDP deflator was 80, what was real GDP? a. $100.0 billion b. $400.0 billion c. $25.0 billion d. $60.0 billion

answer: c

International data on GDP and socioeconomic variables a. are inconclusive about the relationship between GDP and the economic well-being of citizens. b. suggest that poor nations actually might enjoy a higher standard of living than do rich nations. c. leave no doubt that a nation's GDP is closely associated with its citizens' standard of living. d. indicate that there are few real differences in living standards around the world, in spite of the large differences in GDP between nations.

answer: c

U.S. GDP and U.S. GNP are related as follows: a. GNP = GDP + Value of exported goods − Value of imported goods. b. GNP = GDP − Value of exported goods + Value of imported goods. c. GNP = GDP + Income earned by foreigners in the U.S. − Income earned by U.S. citizens abroad. d. GNP = GDP − Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.

answer: d