Economics Chapter 5

A diagram showing the flow of products from businesses to households and the flow of resources from households to businesses. In exchange for these resources, money payments flow between businesses and households.

Circular flow model

The amount of income that households actually have to spend or save after payment of personal taxes.

Disposable personal income

The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.

Expenditure approach

Finished goods and services produced for the ultimate user.

Final goods

Rate of change in a quantity during a given time period, such as dollars per year.

Flow

is the most widely used measure of a nation's economic performance and is the market value of all final goods produced in the United States during a period of time.

GDP

A measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year

GDP chain price index

is a measure that compares changes in the prices of all final goods during a given year to the prices of those goods in a base year.

GDP price chain index

The market value of all final goods and services produced in a nation during a period of time

Gross domestic product

The market value of all final goods and services produced by a nation's residents, no matter where they are located.

Gross national product

Gross domestic product (GDP) is defined as: a. the market value of all final goods and services produced within the borders of a nation. b. incomes received by all a nation's households. c. the quantity of each good and service produced by U.S. residents. d. none of the above.

a

Which of the following correctly gives us national income (NI)? a. Gross domestic product minus depreciation. b. Personal income minus personal taxes. c. Gross domestic product minus indirect business taxes. d. Consumption plus investment plus government plus net exports.

a

If we computed GDP using the expenditure approach, and then computed it using the income approach, which of the following can be expected to be true? a. GDP computed from the expenditure approach will be larger than when GDP is computed using the income approach. b. GDP computed from the expenditure approach will be equal to GDP computed using the income approach. c. GDP computed from the expenditure approach will be smaller than when GDP is computed using the income approach. d. None of the above is correct.

b

Suppose U.S. nominal GDP was $7,500 billion in year X and the GDP chain price index is 120.0. Real GDP in constant year X dollars is: a. $5,488 billion. b. $6,250 billion. c. $6,740 billion. d. $7,789 billion.

b

National income is officially measured by adding: a. the quantity of each final good and service produced valued at its market price. b. the total of all expenditures on newly produced final goods and services (GDP = C + I + H). c. the total of all incomes earned by households from the sale of factors of production. d. capital consumption allowance and gross domestic product (GDP + CCA = NNP).

c

Which of the following is a shortcoming of GDP? a. GDP excludes changes in inventories. b. GDP includes an estimate of illegal transactions. c. GDP excludes nonmarket transactions. d. GDP includes business investment spending.

c

The ________ is a diagram representing the flow of products and resources between businesses and households in exchange for money payments.

circular flow model

Gross domestic product (GDP) does not include: a. used goods sold in the current time period. b. foreign produced goods. c. intermediate as well as final goods. d. All of the above would not be included.

d

The equation for determining real GDP for year X is: a. nominal GDP for year X x 100. average family income b. nominal GDP for year X 100. GDP for year X c. nominal GDP for year X. average nominal GDP d. none of the above.

d

The lower portion of the circular flow model contains factor markets in which households provide: a. output of all final goods and services produced. b. savings, spending, and investment. c. labor, money, and machines. d. land, labor, and capital.

d

Which national income account should be examined to discover trends in the after-tax income that people have to save and spend? a. Gross domestic product (GDP). b. Gross national product (GNP). c. National income (NI). d. Disposable personal income (DI).

d

Which of the following is included in personal income but not in national income? a. Compensation for workers. b. Proprietors' income. c. Corporate profits. d. Social Security payments. e. Rent.

d

is personal income minus personal taxes.

disposable personal income

GDP does count: a. state and local government purchases. b. spending for new homes. c. changes in inventories. d. none of the above. e. all of the above.

e

Personal income is: a. national income minus transfer payments, net interest, and dividends. b. the amount households have available only for consumption. c. total income earned by households before taxes. d. all of the above. e. none of the above.

e

The _______ sums the four major spending components of GDP consisting of: consumption, investment, government, and net exports.

expenditure approach

All changes in nominal GDP are due to price changes.

f

Gross domestic product (GDP) is a satisfactory measure of both economic "goods" and "bads".

f

Gross domestic product is the total dollar value at current prices of all final and intermediate goods produced by a nation during a given time period.

f

The circular flow model illustrates that aggregate spending in the product markets equals 70 percent of aggregate income earned in the factor markets.

f

are finished goods and services produced for the ultimate user.

final goods

is a measurement in units per time period such as dollars per year. For example, income and consumption can be measured per week, per month, or per year.

flow

The national income account method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits is called the

income approach

The national income accounting method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits.

income approach

Taxes levied as a percentage of the prices of goods sold and therefore collected as part of a firm's revenue. Firms treat such taxes as production costs. Examples include general sales taxes, excise taxes, and customs duties.

indirect business taxes

include general sales taxes, excise taxes, and customs duties.

indirect business taxes

Goods and services used as inputs for the production of final goods.

intermediate goods

To avoid double counting, GDP does not include _______.

intermediate goods

The total income earned by resource owners, including wages, rents, interest, profits, and indirect business taxes. NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output.

national income

The value of all final goods based on the prices existing during the time period of production.

nominal GDP

measures all final goods produced in a given time period valued at the prices existing during the time period of production.

nominal GDP

The total income received by households that is available for consumption, saving, and payment of personal taxes.

personal income

is total income received by households and is calculated as national income less corporate profits, and Social Security taxes (FICA) plus transfer payments and other income.

personal income

The value of all final goods produced during a given time period based on the prices existing in a selected base year.

real GDP

is the value of all final goods and services produced during any time period valued at prices existing in a base year.

real GDP

A quantity measured at one point in time—for example, an inventory of goods or the amount of money in a checking account.

stock

is a quantity that exists at a given point in time measured in dollars.

stock

A GDP price chain price index number of 120.0 for a given year indicates that prices in that year are 20 percent higher than prices in the base year.

t

Fixed investment is the dollar amount businesses are adding to our nation's amount of plant and equipment.

t

If the GDP chain price index in a given year is less than 100, real GDP in that year would be greater than nominal GDP.

t

In any year, nominal GDP divided by the GDP chain price index multiplied by 100 equals real GDP.

t

Nominal values are values measured in terms of the prices at which goods and services are actually sold.

t

Over time, nominal GDP rises faster than real GDP because of the effects of inflation as measured by the GDP chain price index.

t

Personal consumption expenditures is the largest component of total spending.

t

The difference between gross domestic product and national income is an estimate of the depreciation of fixed capital

t

A government payment to individuals not in exchange for goods or services currently produced is called a

transfer payment

A government payment to individuals not in exchange for goods or services currently produced.

transfer payment