Economics Today The Macro View Ch. 8 - Measuring the Economy's Performance (Homework, Terms & Quiz)

1) An increase in corporate income taxes would reduce A. net domestic product. B. national income. C. gross domestic product. D. personal income. 2) An increase in social security benefits will make A. national income smaller. B. national income larger. C. personal income larger. D. net domestic product smaller.

1) D. personal income. 2) C. personal income larger.

To correct nominal GDP for price changes, we must first select a base year for our price index and assign it the number ____. Then we construct an index based on how a weighted average of prices has changed relative to that base year. For example, if in the next year a weighted average of the prices indicates that prices have increased by 10 percent, we would assign it the number ____. We then divide each year's price index, so constructed, into its respective nominal GDP figure (and multiply by 100).

100 110

For a​ business, profit is a cost of production. A. True B. False

A. True

National income is income earned by all U.S. factors of production. A. True B. False

A. True

In the circular flow of income A. households demand goods and services that are supplied by​ firms, while supplying resources that are demanded by firms. B. households demand goods and services which are supplied by​ firms, and the firms demand resources that are supplied by intermediate firms. C. households buy goods and services and firms supply goods. Resources are supplied by other firms. D. households buy goods and services while firms sell goods and services. Firms obtain labor from​ households, capital from​ government, and raw materials from firms.

A. households demand goods and services that are supplied by​ firms, while supplying resources that are demanded by firms.

The problem with using foreign exchange rates to convert one​ country's GDP into dollars is that A. not all goods and services are sold on world markets. B. exchange rates do not reflect differences in inflation rates. C. the values of currencies are not comparable. D. the dollar has been losing value over the last twenty years.

A. not all goods and services are sold on world markets.

The following table gives categories for income and expenditures for a representative​ country: -------------------------------------------------------- 1. Net exports of goods and services -(negative)750 2 . Net interest paid by business 600 3. Government purchases of goods and services 2,250 4. Gross private domestic investment 3,000 5. Indirect business taxes 600 6. Rental income of individuals plus implicit rent on​ owner-occupied housing 300 7. ​Wages, salaries, employee compensation 9,000 8. Personal consumption expenses 10,500 9. Depreciation 1, 200 10. Proprietorial income 1,500 11. Corporate profits 1,800 --------------------------------------------------------- Use the data in the table to calculate Gross Domestic Product​ (GDP) for this country. GDP is equal to ​$_____. Use the data in the table to calculate Net Domestic Product​ (NDP) for this country. NDP is equal to ​$_____.

Add -750 2,250 3,000 9,000 1,500 =GDP $15,000. ndp = gdp - depreciation 15,000 - 1,200 = $13,800 NDP

Purchasing Power Parity

Adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries.

Indirect Business Taxes

All business taxes except that tax on corporate profits. Indirect business taxes include sales and business property taxes.

Capital Consumption Allowance

Another name for depreciation, the amount that businesses would have to put aside in order to take care of deteriorating machines and other equipment.

Investment

Any use of today's resource to expand tomorrow's production or consumption.

Which of the following transactions would not be included in​ GDP? A. The town of South Bristol builds a school. B. Scott buys 100 shares of Microsoft stock. C. Jeanne purchases new computers for her small business. D. Chris buys a new car.

B. Scott buys 100 shares of Microsoft stock.

Which of the following is the definition of national income (NI)? A. The market value of all goods and services produced and sold. B. The total of all factor payments to resource owners. C. Personal income after personal income taxes have been paid. D. The amount of income that households receive before paying taxes.

B. The total of all factor payments to resource owners.

Total income is the annual cost of producing the entire output of final goods and services. A. False B. True In product​ markets, A. factor services flow to businesses and money flows to households. B. consumer goods and services flow to businesses and money flows to households. C. consumer goods and services flow to households and money flows to businesses. D. factor services flow to households and money flows to businesses.

B. True C. consumer goods and services flow to households and money flows to businesses.

Suppose social security contributions rise by​ $1 billion while social security benefits also rise by​ $1 billion.​ Further, personal income taxes fall by​ $500 million. As a​ result, A. national​ income, personal​ income, and disposable income should increase. B. disposable income should increase while personal income and national income are unchanged. C. both personal and disposable personal income should increase. D. personal​ income, disposable personal​ income, and national income remain unchanged.

B. disposable income should increase while personal income and national income are unchanged.

When comparing per capita GDP across​ countries, GDP should be adjusted for A. the unemployment rate. B. purchasing power parity. C. population. D. foreign exchange rates.

B. purchasing power parity.

What is the difference between nominal GDP and real​ GDP? A. Nominal GDP is the total value of output produced while real GDP is the amount per individual. B. Nominal GDP is computed by using the expenditure approach while real GDP is computed by using the income approach. C. Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year. D. Nominal GDP represents purchasing power while real GDP is measured in terms of current dollars.

C. Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.

The income households actually receive before they pay personal income taxes​ is: A. disposable personal income. B. national income. C. personal income. D. gross domestic income.

C. personal income.

When GDP is corrected to reflect constant​ dollars, this​ price-corrected GDP is called A. NDP. B. nominal GDP. C. real GDP. D. the GDP deflator.

C. real GDP.

The following transactions take place in​ 2000: 1. An elderly couple go to the movies and pay ​$80 for the tickets. 2. A family sells numerous​ knick-knacks at a garage sale for ​$55. 3. A young executive buys 100 shares of IBM for ​$6,000. 4. A college student receives ​$400 from his parents. 5. A young couple down on their luck receive food stamps worth ​$150. 6. A plumber performs work for a neighbor and receives ​$75 in cash that he​ doesn't record in his​ company's records. 7. A physician operates on a​ friend's husband and charges ​$1,000 for the operation instead of her usual ​$3,000. 8. A teenager paints the porch on his​ parents' house. The paint cost ​$75. The cost of hiring a professional to do the job would have been ​$400. (Remember this) 9. A high school graduate works a summer job and makes ​$4,500. 10. The Federal Reserve Bank sells a bond for ​$1,000. The addition to gross domestic product is A. ​$14,055. B. ​$8,335. C. ​$5,655. D. ​$15, 335.

C. ​$5,655. The GDP will only include market transactions involving currently produced final output. These​ are: #1 for ​$80​; ​#7 for ​$1,000​; ​#8 for 75​; and​ #9 for ​$4,500. The correct total is ​$5,655.

Expenditure Approach (Method #1)

Computing GDP by adding up the dollar value at current market prices of all final goods and services.

Total income can be viewed as the sum of A. the dollar value of output produced since total income and total production are equal. B. ​wages, rents,​ interest, and profits. C. payments to factor services such as​ land, labor,​ capital, and entrepreneurial activity. D. All of the above.

D. All of the above.

The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because A. profit is defined as what is left over from total business receipts after all other costs--​wages, ​rents, interest--have been paid. B. spending by one group is income to another. C. both domestic product and income are measured in terms of market prices. D. Both​ (a) and​ (b) are correct.

D. Both​ (a) and​ (b) are correct.

If nominal GDP​ increases, it is possible that A. output has increased. B. prices have increased. C. both prices and output have increased. D. any of the above might have happened.

D. any of the above might have happened.

The biggest component of GDP using the expenditure approach is​ ____________ and the biggest component of GDP using the income approach is​ _____________. A. government​ expenditures; taxes B. consumer​ expenditures; profit C. investment​ expenditures; profit D. consumer​ expenditures; wages

D. consumer​ expenditures; wages

Constant Dollars

Dollars expressed in terms of real purchasing power, using a particular year as the base or standard of comparison, in contrast to current dollars.

Producer Durables, or Capital goods

Durable goods having an expected service life of more than three years that are used by business to produce other goods and services.

Many other transactions are excluded from measured ____, among them household services rendered by homemakers, underground economy transactions, and illegal economic activities, even though many of these result in the production of final goods and services. GDP is a useful measure for tracking changes in the ____ ____ of overall economic activity over time, but is not a measure of well-being of a nation's residents because it falls to account for non market transactions, the amount and quality of leisure time, environmental or safety issues, labor market discrimination, and other factors that influence general welfare.

GDP market value

capital consumption allowance

GDP = C + I + G + X we know that the formula for NDP is NDP = C + I + G + X - depreciation Alternatively, because net I = I - depreciation, NDP = C + net I + G + X

Intermediate Goods

Goods used up entirely in the production of final goods.

____ ____ ____ is the total market value of final goods and services produced in an economy during a one-year period by factors of production within the nation's borders. It represents the dollar value of the flow of final production over a one-year period. To avoid double counting, we look only at final goods and services or, equivalently, at ____ ____. In measuring GDP, we must ____ (1) purely financial transactions, such as the buying and selling of securities, (2) government transfer payments and private transfer payments; and (3) the transfer of secondhand goods.

Gross domestic product value added exclude

Net Investment

Gross private domestic investment minus an estimate of the wear and tear on the existing capital stock. Net in vestment therefore measures the change in the capital stock over a one-year period.

Income Approach (Method #2)

Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits.

Disposable Personal Income

Personal income after personal income taxes have been paid.

Depreciation

Reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence; also called capital consumption allowance.

Personal Income (PI)

The amount of income that households actually receive before they pay personal taxes.

Gross Private Domestic Investment

The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future. Also included in this definition are changes in business inventories and repairs made to machines or buildings.

Gross Domestic Income (GDI)

The sum of ALL INCOME-- wages, interest, rent, and profits -- paid to the four factors of production.

Nonincome Expense Items

The total of indirect business taxes and depreciation.

The following table contains national income accounting data for a hypothetical​ economy: Disposable personal income - ​$7,000 million Personal income tax and nontax payments - ​$900 million Government and business transfer payments - ​$1,500 million Corporate​ taxes, Social Security​ contributions, and corporate retained earnings - ​$1,100 million Indirect business taxes - ​$900 million Depreciation - ​$1,000 million Starting from the value for disposable personal income​ (DPI), gross domestic product is calculated to be ​$_____ ​(enter your response as an ​integer).

To derive​ GDP, start with disposable personal income ​($7,000 ​million) and add the​ following: personal income tax and nontax payments ​($900 ​million); corporate​ taxes, social security​ contributions, and corporate retained earnings ​($1,100 ​million); indirect business taxes ​($900 ​million); and depreciation ​($1,000 ​million). Then subtract government and business transfer payments ​($1,500 ​million). ------------------------------------- gdp= $9,400

Each​ year, Johan typically does all his own landscaping and yard work. He spends ​$196 per year on mulch for his flower​ beds, ​$218 per year on flowers and​ plants, ​$45 on fertilizer for his​ lawn, and ​$245 on gasoline and lawn mower maintenance. The lawn and garden store where he obtains his mulch and fertilizer charges other customers ​$494 for the service of spreading that much mulch in flower beds and ​$48 for the service of distributing fertilizer over a yard the size of​ Johan's. Paying a professional yard care service to mow his lawn would require an expenditure of ​$1,253 per​ year, but in that case Johan would not have to buy gasoline or maintain his own lawn mower. a. In a normal​ year, calculate by how much does​ Johan's landscaping and yard work contribute to GDP. ​$___. b. Suppose that Johan has developed allergy problems this year and will have to reduce the amount of his yard work. He can wear a mask while running his lawn​ mower, so he will keep mowing his​ yard, but he will pay the lawn and garden center to spread mulch and distribute fertilizer. How much will all the work on​ Johan's yard contribute to GDP this​ year? ​$___. Suppose that Johan has developed allergy problems this year and will have to reduce the amount of his yard work. He can wear a mask while running his lawn​ mower, so he will keep mowing his​ yard, but he will pay the lawn and garden center to spread mulch and distribute fertilizer. At the end of the​ year, Johan realizes that his allergies are growing worse and that he will have to arrange for all his landscaping and yard work to be done by someone else next year. How much will he contribute to GDP next​ year? ​$___.

a. $704 (196+218+45+245) b. $1,246 (704+494+48) c. $2,254 (???)

Which of the following are production activities that are included in​ GDP? Which are​ not? a. Mr. King performs the service of painting his own house instead of paying someone else to do it. This activity is included/excluded in GDP. b. Mr. King paints houses for a living. This activity is included/excluded in GDP. c. Mrs. King earns income from parents by taking baby photos in her home photography studio. This activity is included/excluded in GDP. d. Mrs. King takes photos of planets and stars as part of her astronomy hobby. This activity is included/excluded in GDP. e. ​E*Trade charges fees to process Internet orders for stock trades. This activity is included/excluded in GDP. f. Mr. Ho spends​ $10,000 on shares of stock via an Internet trade order. This activity is included/excluded in GDP. Mr. Ho pays a​ $10 brokerage fee. This activity is included/excluded in GDP. g. Mrs. Ho receives a Social Security payment. This activity is included/excluded in GDP. h. Ms. Chavez makes a​ $300 payment for an​ Internet-based course on stock trading. This activity is included/excluded in GDP. in GDP. i. Mr. Langham sells a used laptop computer to his neighbor. This activity is included/excluded in GDP.

a. excluded b. included c. included d. excluded e. included f. excluded; included g. excluded h. included i. excluded

The quality of cancer treatments​ increases, so patients undergo fewer​ treatments, which hospitals continue to provide at the same price per treatment as before. As a result of this GDP _____.

decreases

Explain what happens to contributions to GDP in each of the following situations. a. A woman who makes a living charging for investment advice on her Internet Web site marries one of her​ clients, to whom she now provides advice at no charge. As a result of​ this, GDP _____ . b. A tennis player wins two top professional tournaments as an unpaid​ amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of​ this, GDP ______.

decreases remains unchanged

Which of the following activities of a computer manufacturer during the current year are included in this​ year's measure of GDP​? a. The manufacturer purchases a chip in June. This activity is _____ in GDP. Then the manufacturer uses it as a component in a computer in August. This activity is _____ in GDP. (remember this) Finally, the company sells the computer to a customer in November. This activity is _____ in GDP. b. A retail outlet of the company sells a computer manufactured during the current year. This activity is _____ in GDP. (remember this) c. A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider. This activity is _____ in GDP.

excluded included included excluded included

In the circular flow model of income and output, households sell ____ services to businesses that pay for those services. The receipt of payments is total ____. Businesses sell goods and services to households that pay for this item.

factor income

In the circular flow model of income and​ output, households sell _____ services to businesses that pay for those services. The receipt of payments is total _____. Businesses sell goods and services to households that pay for them. The dollar value of total output is equal to the total monetary value of all _____ (intermediate/final) goods and services produced. The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as _____.

factor income final profit

The dollar value of total output is equal to the total income monetary value of all ____ goods and services produced. The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ____.

final profit

To obtain ____ ____, we subtract indirect business taxes and transfers from net domestic product and add other business income adjustments and net U.S. income earned abroad. To obtain ____ ____, we must add government transfer payments, such as Social Security benefits and food stamps. We must subtract income earned but not received by factor owners, such as corporate retained earnings, Social Security contributions, and corporate income taxes. To obtain disposable personal income, we subtract all personal ____ ____ from personal income. Disposable personal income is income that individuals actually have for consumption or saving.

national income personal income income taxes

Real GDP (formula)

nominal GDP = ------------------- X 100 price index