Econ Chapter 12

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Why is real GDP not a perfect measure of​ well-being?

GDP does not include crime rates or income distribution. The costs of pollution are not included. The value of leisure is not included.

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

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

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.

National income formula

GDP minus depreciation.

What is not a shortcoming of GDP as a measure of​ well-being?

GDP only counts final goods and services and not intermediate 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 (Gross National Product)

If Americans still worked​ 60-hour weeks, as they did in​ 1890, then how would that reflect in GDP and Well-Being

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

The Bureau of Economic Analysis' does not include what when estimating GDP?

Household production and the underground economy

Is it a serious shortcoming of GDP that it does not count household production or production in the underground​ economy?

NO: these types of production do not affect the most important use of the GDP​ measure (changes in total production over short periods of time)

Purchases of new​ machines, factories, or houses are considered as

investment

Personal income is

national income - retained corporate earnings + government transfer payments and interest on government bonds.

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

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

Disposable personal income is equal to

personal income minus personal tax payments.

Disposable personal income is

personal income minus personal taxes.

If the GDP deflator (a measure of the price level, calculated by dividing NGDP by RGDP and multiplying by 100:) in 2012 has a value of​ 98.0, then

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

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

households

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 (using previous-year prices to adjust current-year production)

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

spending by​ federal, state, and local governments

Gross domestic product (GDP) 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.

Real GDP is

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

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

value added.

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.

What are the four major categories of​ expenditure?

​Consumption, investment, government​ purchases, and net exports.

What are the four categories of​ income?

​Wages, Interest,​ Rent, and Profit.

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

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

Subtract what from GDP to obtain national​ income?

depreciation

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

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

If prices are rising what would be true of the relationship between nominal GDP and real GDP

RGDP​ < NGDP because prices are rising.

Real GDP Formula

Sum of Q2 * P1

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

add government transfer payments


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