Economics chapter 5

4 categories of users

households, firms, governments, and the foreign sector

Which of the following factors are NOT included in the calculation of GDP? 1) Volunteer services 2)Crime rates 3) consumption expenditure 4) poverty rates

volunteer services, crime rates and poverty rates

Government transfer payments include all of the following except:

wage payments to police officers because they are payed in exchange for services.

Consumption expenditure

(or consumption) spending by households on goods and services such as food, clothing and entertainment contains 3 subcategories

Transfer payments are not included in the GDP because they

... Are not made in exchange for current goods and services

GDP can be expressed as ____

1) The total amount spent by households, firms, and the government in addition to net exports 2) The total market value of all final goods and services that are produced domestically each year 3) labor income plus capital income

When we choose to work less than our grandparents did and, in exchange, spend more time with family and friends, it means that...

1) We emphasize leisure over specific earnings 2) We are living in a society that is better off than our grandparents generation 3) The opportunity cost of forgone earnings is lower than our grandparents

GDP is an imperfect measure of well-being since

1) it only measures production, not the distribution of wealth 2) it does not capture the effects of income inequality

GDP

1) the market value of production 2) total expenditure (consumption, investment, government purchases, net exports) 3) total income (labor income and capital income)

Out of the labor forces

A person is considered to be out of the labor force if he or she did not work in the past week and did not look for work in the past four weeks. In other words, people who are neither unemployed nor employed are "out of the labor force" full time students, unpaid homemakers, retirees, and people unable to work because of disabilities are examples of people who are out of the labor force

True or false: Economic policies should be evaluated strictly in terms of weather or not they increase GDP

FALSE GDP is NOT a perfect measure of economic well-being

True or False: Government purchases include only federal purchases of final goods and services

False! they also include state and local government expenditures on final goods and services

C + I + G + NX= ?

GDP

real GDP

GDP adjusted for inflation. a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; real GDP measures the actual physical volume of production

Business fixed investment

The purchase by firms of new capitol goods such as machinery, factories and office buildings. Firms buy capitol goods to increase their capacity to produce

the relationship between GDP and expenditures on goods and services can be summarized by an equation...

Y= gross domestic product, or output C= consumption expenditure I= investment G= government purchases NX= net exports Y= C+I+G+NX

services

a large component of consumer spending, include everything from haircuts and taxi rides to legal, financial, and educational services

capitol good

a long-lived good that is used in the production of other goods and services (ex: factories and machines) classified as final goods if newly produced

nominal GDP

a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production

unemployment spell

a period during which an individual is continuously unemployed

unemployed

a person is unemployed if he or she did not work during the preceding week but made some effort to find work in the past four weeks

real GDP is a measure of GDP that

adjusts for inflation

imports

are purchases by domestic buyers of goods and services that were produced abroad. Since exports are included in consumption, investment, and government purchases but do not represent spending on domestic production, they must be subtracted. Imports are subtracted from exports to find the net amount of spending on domestically produced goods and services. add net exports

nominal GDP measures the value of all goods and services

at current-year prices

capital income includes the payments made to the owners of ____

both physical capital (such as machinery) and intangible capital (such as copyrights)

underground economy

buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal

GDP can be thought of as

capitol income plus labor income

labor income

comprises wages, salaries, and the incomes of the self-employed

labor income

consists of wages, salaries, and the income of the self-employed

GDP calculations count only final goods and services because

counting all intermediate goods and services would lead to doubles-counting of many activities

net exports include goods produced

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

The labor fore is the total number of ______ and ____

employed and unemployed

net exports

equal to exports minus imports

The unemployment rate is the

fraction of the labor force that is unemployed

final goods or services

goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of the GDP

Intermediate goods or services

goods or services used up in the production of final goods and services and therefore not counted as part of the GDP

Some goods and services that are not sold in markets ARE included in aggregates measures of the GDP. The most important of these includes goods and services provided by the

government

the addition of unsold goods to company inventories is...

included in GDP AND known as inventory investment

GDP

incomes of capital and labor

the purchase of financial assets such as stocks and bonds

is NOT considered part of investment spending in calculating GDP

Residential investment

is construction of new homes and apartment buildings. For GDP accounting purposes, residential investment is treated as an investment by the business sector, which then sells the homes to households.

capital income

is made up of payments to owners of physical capital (such as factories, machines, and office buildings) and intangible capital (such as copyrights and patents). The components of capital income include items such as profits earned by business owners, the rents paid to owners of land or buildings, interest received by bondholders, and the royalties by the holders of copyrights or patents.

why is environmental quality and resource depletion often left out of GDP measures

it is difficult to measure the value of clean air and rivers

real GDP is an imperfect measure of economic well-being because

it measures only goods and services that are prices and sold in markets

The underground economy contains both _________ and ________ activities, such as landscapers, babysitters, and organized crime

legal and illegal

consumer durables

long-lived consumer goods such as cars and furniture. Note that new houses are not treated as consumer durables but as part of investment

Gross Domestic product (GDP)

measures how much an economy produces in a given period, such as a quarter or a year. More precisely, GDP is the market value of the final goods and services produces in a country during a given period

economists include ____ as a component of GDP

net exports (NOT total exports)

which of the following are "quality of life" indicators that are left out of the GDP? 1) open space 2) low crime rate 3) resource depletion 4)cost-of-living

open space and low crime rate (cost of living is included in GDP through normal markets)

Discouraged workers

people who say they would like to have a job but have not made an effort to find one in the past four weeks

involuntary part-time workers

people who say they would like to work full-time but are able to find only part-time work

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

produced outside

government purchases

purchases by federal, state, and local governments of final goods such as fighter planes, and services, such as teaching in public schools. Government purchases do NOT include transfer payment, which are payments made by the government in return for which no current goods or services are received. example of transfer payments are social security benefits

A measure of GDP in which the quantities produced are valued at prices in a base year rather than at current prices is _____ GDP

real GDP

By aggregating the market values of goods and services, more expensive, economy-wide items...

receive a higher weighting than less expensive items

consumer nondurables

short-lived goods like food and clothing

investment

spending by firms on final goods and services, primarily capital goods and housing. divided into 3 categories (business fixed, residential, inventory)

For the purposes of GDP accounting, government purchases include:

spending on highway construction and the purchase of new military equipment (NOT social security payments)

inventory investment

the addition of unsold goods to company inventories. In other words, the goods that a firm produces but doesn't sell during the current period are treated, for accounting purposes, as if the firm had bought those goods from itself. (this convention guarantees that production equals expenditure) inventory investment can be positive or negative, depending on whether the value of inventories on hand rises or falls over the course of the year

duration

the duration of unemployment rises during recessions, reflecting the greater difficulty of finding work during those periods

which method of calculating GDP adds up consumption, investment, government purchases and net exports?

the expenditure method

unemployment rate

the number of unemployed people divided by the labor force

Participation Rate

the percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work) calculated by dividing the labor force by the working age (16 years+) population

which of the following is NOT included in investment spending in calculating GDP

the purchase of stocks and bonds

market value

the selling prices of goods and services in the open market. - drawback: not all economically valuable goods and services are bought and sold in markets

Labor force

the total number of workers, including both the employed and the unemployed

value added

the value added by any firm equals the market value of its product or service minus the cost of inputs purchased from other firms

Suppose an auto manufacturer has 5,000 light-duty trucks left over on its lot at the end of the year 2016. In early 2017, the auto manufacturer sells the trucks to a dealer. How will the value of these trucks be added to GDP?

the value of the trucks is included in GDP for 2016, since that is when they were produced

In countries where non-market activities are widespread, the official measure of GDP tends to be...

understated