Intro to Macro Chapter 10

Goods that go into inventory and are not sold during the current period are A. counted as intermediate goods and so are not included in current period GDP. B. counted in current period GDP only if the firm that produced them sells them to another firm. C. included in current period GDP as inventory investment. D. included in current period GDP as consumption.

C

trade deficit

NX is negative

trade surplus

NX is positive

Final Production

Finished products sold to the end user

GDP per capita

GDP per capita (per person) tells us the average income (via average production) of the typical citizen. GDP per capita is GDP divided by total population.

Gross National Product

The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.

Y

Y = C + I + G + Net exports - Net imports

GDP deflator

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

intermediate production

goods that are produced by one firm to be further processed by another firm

In GDP accounting, which levels of government spending are included in government spending? a. Spending by the federal government only. b. Spending by federal, state, and local governments. c. Spending by the federal government and some state governments, but not local governments. d. Spending by governments only as they relate to national security, social welfare, and other national programs.

b

Double Counting

overstating the value of production by adding the values of both intermediate and final goods to GDP.

Transfer Payment

payment for which the government receives neither goods nor services in return

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 all levels of government

Real GDP

the production of goods and services valued at base year prices

Nominal GDP

the production of goods and services valued at current prices

What does GDP measure?

the total income of everyone in the economy and the total expenditure on the economy's output of goods and services

Gross Domestic Product (GDP)

total output of all goods and services produced within the boundaries of a country

Base year

year used as a point of comparison to measure real GDP

A farmer produced wheat and sold it to the miller for $1. The miller milled the wheat into flour and sold it to a baker for $2. The baker baked the flour into bread and sold the bread to a consumer for $3. From the perspective of calculating GDP, what mistake are you making if you assume that GDP increases by $6 as a result of these transactions? A. using the value-added method B. double counting C. forgetting to include how much the farmer paid for wheat seeds D. disregarding whether the consumer uses the bread to make a turkey sandwich or a grilled cheese sandwich E. statistical discrepancy

B

Gross domestic product measures these two things at once: A. the total spending of everyone in the economy and the total saving of everyone in the economy. B. the total income of everyone in the economy and the total expenditure on the economy's output of goods and services. C.the value of the economy's output of goods and services for domestic citizens and the value of the economy's output of goods and services for the rest of the world. D.the total income of households in the economy and the total profit of firms in the economy.

B

Consider two cars manufactured by Chevrolet in 2017. During 2017, Chevrolet sells one of the two cars to Sean for $24,000. Later in the same year, Sean sells the car to Kati for $19,000. The second automobile, with a market value of $30,000, is unsold at the end of 2017 and it remains in Chevrolet's inventory. The transactions just described contribute how much to GDP for 2017? A. $24,000 B. $43,000 C. $54,000 D. $73,000

C

The difference between the price the firm sells a good for and the price it paid other firms for intermediate goods is called: a. Producer surplus. b. Fixed investment. c. Value added. d. Profit.

C

When an American household purchases a bottle of Italian wine (produced in Italy) for $100, A. U.S. consumption does not change, U.S. net exports decrease by $100, and U.S. GDP decreases by $100. B. U.S. consumption does not change, U.S. net exports increase by $100, and U.S. GDP increases by $100. C. U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change. D. U.S. consumption increases by $100, U.S. net exports do not change, and U.S. GDP increases by $100.

C

GNP = GDP - (domestic production of foreign nationals) + (production of our nationals abroad)

Countries which have many foreign firms operating within their territory, have a GDP larger than the GNP. Countries which have many of their firms operating in foreign countries, have a GDP smaller than GNP.

Assume that all of the following transactions occurred in 2017. Which of the following would impact GDP in 2017? A. at a rummage (garage) sale, you buy two used old books and an old used rocking chair. B. James receives his Social Security check. C. John buys an Italian sports car. D. Henry buys domestically produced tools and machines for his construction company. E. A U.S. corporation purchases earthmoving equipment from China.

D

total income

wages, rent, and profit

Excludes GDP

• Value of intermediate goods • Secondhand goods • Illegal production and out-of-market transactions • Transfer payments

Which of the following items is not included in U.S. GDP? A. final goods and services produced in the US that are purchased by U.S. households B. goods that are produced in the U.S. but that are unsold at the end of the GDP accounting period C. final goods and services produced by foreign citizens working in the U.S. legally D. the estimated value of production accomplished at home that never enter a marketplace, such as backyard production of fruits and vegetables. E. legal services such as those provided by doctors and lawyers

D

USA GDP

18.57 trillion

Recession

A period of declining real GDP, accompanied by lower real income and higher unemployment.

During an economic expansion, total production __________ and total unemployment _________ A. increases; decreases B. increases;increases C. decreases;increases D. decreases; decreases

A

In the equation that sums up the information on the components of GDP, Y = C + I + G + NX, which component is the largest? a. C. b. I. c. G. d. NX.

A

Which of the following is included in the economist's definition of investment?

A

Depreciation

A decrease or loss in value

What is included in GDP?

Goods and services produced within national borders (includes exports) • Final goods and services • Sold legally in markets • Newly-produced goods and services • Inventories • Rent and estimated rental value of owner-occupied houses

Shortcomings of GDP

However GDP has shortcomings, both in its measure of total production, and in its usefulness as a measure of well-being. GDP DOES NOT account for: Happiness value of leisure pollution or quality of environment distribution of income Production that never enters a market: household production, underground economy (10%+ of economy in the U.S.) crime or societal problems debt

Common Misconceptions to Avoid

Investment" in reference to national income accounting has a very narrow definition: purchases of things like machines, factories, and houses. It refers only to the purchase of new items, not trades in financial instruments based on those items. We based statements about growth on GDP; but GDP has limitations, both as a measure of total production, and as a measure of well- being. In order to make useful comparisons, concentrate on real GDP rather than nominal GDP. In reality, the choice of base year is largely arbitrary; there is no "correct" base year.

GDP deflator equation

Nominal GDP/Real GDP x 100

total expenditure

consumption, investment, government purchases, and net exports

Business cycles are A. The relationship between unemployment and inflation. B. short-run fluctuations in RGDP. C. positive relationship between the quantity of money in an economy and inflation. D. long-run trend growth in RGDP.

d

Dairy Corporation produces cheese and sells it to Dominos Pizza, which makes pizzas. Dominos Pizza then sells the pizzas to consumers. The cheese produced by Dairy Corporation is called A. an inventory good. B. a transitory good. C. a physical capital. D. an intermediate good. E. a final good.

d

Suppose an economy produces only eggs and ham. In 2012, 100 eggs are sold at $3 per egg and 50 pounds of ham are sold at $4 per pound. In 2011, 150 eggs are sold at $1.50 per egg and 52 pounds of ham are sold at $5 per pound. For 2012, a. nominal GDP is $400, real GDP is $500. b. nominal GDP is $400, real GDP is $400. c. nominal GDP is $500, real GDP is $500. d. nominal GDP is $500, real GDP is $400.

d

Who dates US troughs and peaks? A. The Federal Reserve. B. The Bureau of Labor Statistics (BLS) C. The Bureau of Statistics (BS). D. The Business Cycle Dating Committee. E. Match.com.

d