Chapter 5

Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?

Expenditures Approach

Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?

Expenditures approach

What GDP uses prices adjusted for inflation?

Real

Investment goods

are the plant, machinery, and equipment that we produce.

Durable Goods

products that have expected lives of three years or more

National income is:

(GDP) - (Depreciation) + (Net foreign factor income)

Net domestic product is:

(GDP) - (depreciation)

Expenditure Method

- Government spending - Consumer spending - Net exports - Investment spending

Which of the following are included in the calculation of the GDP of an economy?

- Government spending on highways - Purchase of a new car produced in the economy - Purchase of a lawnmower produced in the economy

Which of the following is subtracted from national income to arrive at personal income?

- Indirect business taxes - Corporate profits

Two types of Non-production transactions

1. Financial Transactions 2. Secondhand Sales

inflation

An increase in the average level of prices of goods and services.

What type of market transactions are not included in measuring GDP?

Black, Secondhand, and Stock

What letter symbolizes personal consumption expenditures component of GDP?

C

Using the expenditure approach, which of the following defines the composition of GDP in an open economy?

C + I + G + (X-M)

Expenditures within the border of the United States, GDP formula is:

C+Ig+G+Xn+M

Imports outside the border of the United States, GDP formula is:

C+Ig+G+Xn-M

Added to national income to arrive at personal income:

Capital income transfer payments

The largest component of national income

Compensation of employees by firms

Which of the following is not included in the expenditure approach of GDP?

Depreciation

import

Goods and services purchased from international sources.

exports

Goods and services sold to foreign buyers.

consumption goods.

Goods and services used by households are called

Intermediate goods

Goods or services purchased for use as input in the production of final goods or in services.

equation of net investment

Gross investment minus depreciation

Products that are purchased for resale or further processing or manufacturing

Intermediate goods

Crude oil is a(n) ______ good. Gasoline is a(n) ____ good.

Intermediate, final.

What GDP uses current prices?

Nominal

What income is the net income of sole proprietorships, partnerships, and other unincorporated businesses?

Proprietors'

gross domestic product (GDP)

The total market value of all final goods and services produced within a nation's borders in a given time period.

measures of income

The total value of market incomes must equal the total value of final output, or GDP.

net exports

The value of exports minus the value of imports: (X − M).

real GDP

The value of final output produced in a given period, adjusted for changing prices.

Nominal GDP

The value of final output produced in a given period, measured in the prices of that period current prices

Gross investment

Total investment expenditure in a given time period.

All final purchases of plant, machinery and equipment in a given time period are included as gross investment. T/F

True

True or False: GDP is a monetary measure

True

An intermediate good is:

a good used in the production of final products

Why do the accountants regard residential construction as investment rather than consumption?

because apartment buildings and houses, like factories and stores, earn income when they are rented or leased.

GDP per capita can be used as a rough estimate of living standards...

but it tells us nothing about the way GDP is actually distributed or used

national income

by charting the flow of income through the economy, we see FOR WHOM the output is produced.

All new ouput that is not consumed is

capital

Retained earnings are a category of

corporate profits

If net investment is negative, the capital stock has...

decreased

in order to avoid problems created by using money values to measure GDP, when prices rise GDP should be ____ and when prices fall GDP should be _____

decreased; increased

Gross rental income minus ____ equals net rent

depreciation

Consumption goods and capital goods and services purchased by their end consumers are

final goods

Investment includes

final purchases of machinery, equipment, and tools by business enterprises

To avoid counting components each time, GDP includes only

finals goods

G =

government expenditure

M =

imports

Viewing GDP in terms of earnings derived or created by producing something is called what?

income approach

If GDP included unreported income, GDP would:

increase

If a mother enters the workforce and hires a nanny to take care of her children, GDP will ____ and we ____ definitively state that the standard of living went up by and how much

increase; cannot

If net investment is positive, the capital stock has...

increased

Subtracted from national income to arrive at personal income:

indirect business taxes corporate profits

An increase in the average level of prices of goods is ____.

inflation

I =

investment expenditure

net investment

is gross investment less depreciation.

Gross domestic product (GDP)

is the total dollar value of final output produced within a nation's borders in a given time period.

Real GDP

is the value of final output produced in a given period, adjusted for changing prices.

Multiple counting can be avoided by

measure and cumulating only the value added.

The chain-weighted price indexes employed by the U.S. Department of Commerce to compute real GDP use a ____ average of price levels in consecutive years as an inflation adjustment.

moving

Gross ____ product refers to the output produced by American-owned factors of production regardless of where they're located.

national

Income earned through the use of American-owned resources for services and production is called

national income

If net investment is ____, the capital stock has decreased. If net investment is ____ the capital stock has increased.

negative; positive

In economies where there are many women working outside the home, the increase in GDP due to hiring nannys and housekeepers may ____ improvements in the living standards.

overstate

What we call "consumption expenditures by households," the national-income accountants call

personal consumption expenditure.

The term that covers all expenditures by households is

personal consumption expenditures

Income received by households before payment of personal taxes is called:

personal income

disposable income=

personal income - personal taxes

Payments that transfer funds from one individual to another individual are not connected to any production are called

private transfer

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

produced outside

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

produced outside

Personal income is the income households have

received

Gross national product

refers to the output produced by American-owned factors of production regardless of where they're located.

Undistributed corporate profits are called

retained earnings

National income accounting measures

the economy's overall performance

national income accounting

the measurement of aggregate economic activity, particularly national income and its components

An increase in inventories is an addition to what? What is this define

the stock of capital goods. Investment.

Depreciation is:

the wearing out of plant and equipment

Which one of the following is not included in the calculation of GDP

"Underground" purchases

Suppose consumption is $220b, government spending is $70b, investment is $50b,and GDP is $310b. Given this, net exports = ______b.

$-30b.

If households have a disposable income of $6,700 billion and paid $1,900 billion in personal taxes, then personal income must be

$8,600 billion.

Value of output

- Net exports - Investment spending - Consumer spending - Government spending

Value of income

- Profits - Interest - Rent - Wages

Which of the following are added to national income to arrive at personal income?

- Transfer payments - Capital income

Income Methond

- Wages - Rent - Interest - Corporate profits

A final good is:

- directly counted as part of GDP - a good directly consumed by individuals or businesses

GDP accounts have two sides:

-expenditure: demand side -income: supply side

The national accounts keep track of:

1. Business investment 2. Sales of producers 3. Spending by consumers and government

Items that comprise national income:

1. Interest 2. Compensation of employees 3. Proprietors' income 4. Taxes on production and imports 5. Rents 6. Corporate profits

What are the two ways to adjust nominal GDP to reflect price changes?

1. Multiply the current year's output by price of the output in the base year. 2. Nominal GDP divided by the price index

For the purpose of GDP accounting, government purchases include

1. The purchase of new military equipment 2. Spending on highway construction

A price index

1. always includes a base year. 2. measures the cost of purchasing a market basket of output across different years. 3. is normalized to 100 for the base year.

Part of taxes on production and imports

1. customs duties 2. business property taxes 3. license fees 4. excise taxes 5. general sales taxes

Private domestic investment expenditures consist of

1. newly produced housing 2. spending on new plant and equipment 3. any increase in inventories

As a measurement of economic output and the nation's wealth, GDP fails to account for

1. non-market activities 2. the underground economy 3. leisure time 4. improved product quality

Identify the things that would improve society's well-being but that are not measured as part of GDP

1. peaceful relations with other countries 2. better family relationships 3. reduced crime and violence 4. reduction of drug and alcohol abuse

two ways of looking at GDP

1. see how much the final user paid for it. 2. adding up the entire wage, rental, interest, and profit incomes.

As a measurement of economic output and the nation's wealth, GDP fails to account for: (measured with GDP)

1. underground economy 2. improved product quality 3. leisure time 4. non-market activities

If the price of a market basket of goods in year 1 is $10 and $25 in year 3 and the base year is year 1, the price index for year 3 is what?

250

The value of undergroup transactions in the U.S. is approximately what percent of recorded GDP?

8

Why is the value of final goods included in GDP but the value of intermediate goods excluded?

Because the value of final goods already includes the value of all the intermediate goods that were used in producing them.

GDP =

C + I + G + (X − M)

net investment

Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories. Gross investment less depreciation. -Minus-

True of false: Consumers are free to divide their income between saving and investment.

False

True or False: GDP is a perfect and complete measure of well being?

False

True or False: Intermediate goods are included in the calculation of GDP.

False

True or False: The transfer of claims to existing capital goods creates new capital

False

Net Domestic Product (NDP)

GDP - depreciation

Per capita GDP is

GDP divided by the total population

GDP VS GNP

GDP is geographically focused, including all output produced within a nation's borders regardless of whose factors of production are used to produce it.

net domestic product (NDP)

GDP less depreciation.

Net Domestic Product (NDP)

GDP less depreciation. This is the amount of output we could consume without reducing our stock of capital and thus next year's production possibilities.

Used as a rough estimate of living standards

GDP per capita

International comparisons of total output use

GDP per capita Gross Domestic Product

GDP per capita means:

GDP per person

What includes all federal, state, and local government outlays on final goods?

Government purchases

A nation's _____ reflects the total market value of all final goods and services produced within an economy in a given year

Gross Domestic Product

Which of the following is equal to net investment?

Gross investment minus depreciation

uses of output

Households - consumption Business Firms - investment Government - government spending Foreigners - net exports

What letter symbolizes Gross Private Domestic Investment component of GDP?

Ig

Personal Income (PI)

Income received by households before payment of personal taxes.

If a stay at home mom enters the workforce and hires a nanny then GDP will

Increase and we cannot definitively state that the standard of living went up and by how much

What consists of the money paid by private businesses to the suppliers of loans used to purchase capital?

Interest

Expenditure Method

Investment spending government spending net exports consumer spending

What happens to the size of the capital stock when gross investment and depreciation are equal?

It stays the same

The formula for calculating a price index is:

Price of market basket in a specific year divided by the price of the same market baset in the base year multiplied by 100.

What is the income received by households and businesses that supply property resources?

Rent

saving

That part of disposable income not spent on current consumption; disposable income less consumption.

depreciation

The consumption of capital in the production process; the wearing out of plant and equipment. .

income and expenditure

The flow of income that starts with GDP ultimately returns to the market in the form of new consumption (C), investment (I), and government purchases (G).

True of False: Calculating national income helps us understand FOR WHOM our output was produced.

True

True of false: Even though measuring some things that give us pleasure (like sunsets) is difficult to do, as long as the components of GDP bear some positive relation to our well-being, it serves a purpose.

True

True or False: Residential construction is a gross private domestic investment?

True

The market value of a firm's output less the value of the inputs the firm has bought from others

Value Added

Real Gross Domestic Product (GDP) is a measure of GDP that

accounts for price change

Personal Consumption Expenditures cover

all expenditures by households on goods and services.

When including the value of intermediate goods...

along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP

Aggregate output

annual total output of goods and services

Aggregate output is the primary measure of the economy's

annual total output of goods and services

The chain type of The real-world, more complex GDP price index used in the United States is

annual weighted price index

imports

are goods and services purchased from foreign sources.

exports

are goods and services sold to foreign buyers.

Intermediate goods

are goods or services purchased for use as input in the production of final goods or services.

"Underground" purchases

are not included in the calculation of GDP

Final goods are products that

are purchased by their end users.

Final goods

are the goods produced at the end of the production sequence, for use by consumers (or other market participants).

Net exports

are the value of exports minus the value of imports.

Real GDP, or adjusted GDP reflects

changes in the price level.

Components of the expenditure approach to measuring GDP:

consumption government spending gross investment

Goods and services purchased by households called

consumption goods

Secondhand sales are excluded from the calculation of GDP because they do not

contribute to current production

National income is the sum of compensation of employees, rents, interest, proprietors' income, taxes on production and imports, and:

corporate profits

The annual amount allocated to wear and tear on private investment is called

depreciation

The reimbursement businesses receive for the wear and tear that occurs on the capital resources they own is called

depreciation.

The distinction of imports from domestic-made goods is ____ to establish.

difficult

A final good is

directly counted as part of GDP a good directly consumed by individuals or businesses

It is difficult to

distinguish between imports of domestic-made goods

One of the shortcomings of GDP is that it doesn't reveal anything about

distribution of output

The after-tax profits that are distributed to stockholders are called

dividends

net exports include goods produced

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

we can view GDP in terms of the income derived or created from producing it as the

earning or allocations approach a.k.a. income approach

The effects of negative by-products reduce social and _____ well-being

economic.

National income accounting measures the overall performance of the

economy

wages and salaries piad buy businesses and government to their workers are called

employee compensation

Goods that are produced in a particular period but NOT sold in that period

end up in inventories and are included in investment

viewing GDP as the sum of all the money spend in buying it is output approach a.k.a.

expenditure approach

The view of GDP as the sum of money spend on buying it is called the

expenditure approach.

GDP accounts have two sides: one side focuses on the demand side called the ____ approach and the other side focuses on the supply side called the ____ approach.

expenditure; income

The view of GDP as the sum of money spent on buying it is called what?

expenditures

X =

exports

we measure gross domestic product by multiplying the quantities of goods bye their prices because it allows us to

express the values of products in a common unit of measurement

When describing the flow of income, GDP returns to the market in the form of

government spending investment consumption

All the final purchases of machinery, equipment, and tools by business enterprises, including construction, and changes in inventories make up

groos private domestic investment

Polluted air and water are examples of

gross domestic and negative by products

The dollar value of all final goods and services produced within the borders of a given country during a given period of time is the definition of

gross domestic product

All the final purchases of machinery, equipment, and tools by business enterprises, all construction, and changes in inventories make up what?

gross private domestic investment.

flow of income

households, in the form of disposable income. To businesses, in the form of retained earnings and depreciation allowances. To government, in the form of taxes

Net exports is exports minus ___

imports

Net exports is exports minus ____.

imports

By ignoring the value of leisure time, how does national income accounting affect our well-being?

in understates our well-being.

All residential construction are treated as

income

GDP can also be measured using the ____ approach, which adds the items that make up national earnings.

income

The flow of ____ is the idea that the dollar value of output will always equal the dollar value of income.

income

Nominal GDP is not an accurate measure of the real level of economic activity in a country because

inflation distorts the real value of all goods and services produced

American-owned factors of production employed in other nations creates an ____ of income for U.S. households.

inflow

American-owned factors of production employed in other nations creates an

inflow of income for US households

Income Method

interest rent corporate profits wages

Including the value of ____ goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.

intermediate

Goods and services that are purchased for resale or for further processing or manufacturing are called

intermediate goods

residential construction is considered a(n) ___ rather than consumption

investment

underground economy

is motivated by tax avoidance or to conceal illegal activities.

Investment

is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.

Saving

is that part of disposable income not spent on current consumption -disposable income less consumption.

Disposable income (DI)

is the after-tax income of households. It is personal income less personal taxes.

Net domestic product

is the amount of output we could consume without reducing our stock of capital.

Depreciation

is the consumption of capital in the production process — the wearing out of plant and equipment.

Personal income (PI)

is the income received by households before payment of personal taxes.

Inflation

is the increase in the average level of prices of goods and services. it tends to obscure actual declines in real output.

Value added

is the increase in the market value of a product that takes place at each stage of the production process.

base period

is the time period used for comparative analysis. It is the basis for the indexing of price changes.

Nominal GDP

is the value of final output produced in a given period, measured in the prices of that period (current prices).

GDP per capita

is total GDP divided by total population-average of GDP. its commonly used as a measure of a country's standard of living.

National income (NI)

is total income earned by current factors of production.

gross investment

is total investment expenditure in a given time period.

Primary measure of the economy's performance is

its annual total output of goods and services. a.k.a. aggregate output

A business firm measures

its flows of income and expenditures regularly.

economists compare the __ value of the total output in various years, rather than __ volumes of production

market; actual

What are factors added to or subtracted from national income to balance the accounting statement of GDP?

net foreign factor income statistical discrepancy consumption of fixed capital

Gross investment minus depreciation is equal to

net investment

The flow of income that starts with GDP ultimately returns to the market in the form of:

new consumption, investment, and government purchases

GDP calculated using current prices is called

nominal GDP

The formula for real GDP is:

nominal GDP divided by price index (in hundredths)

When computing GDP using current prices, it is referred to as

nominal GDP.

What are the three categories of personal consumption expenditures?

nondurable goods durable goods services

transfer payments are excluded from government purchases in GDP accounting because

nothing is being produced in return for the payment

Government spending

on goods and services (excludes income transfers) claims about one-fifth of our annual output.

To measure aggregate output accurately, all goods produced in a particular year must be counted

once and only once.

At present, government spending on goods and services claims roughly ____ of total U.S. output

one-fifth

Using the figure illustrated, per capita real GDP data ____ social well being till 1995.

overestimates

Disposable income equals:

personal income minus personal taxes

Exports are included in GDP because the goods and services are

produced within the borders of the United States.

nondurable goods

products with less than three years of expected life.

Gross National Product (GNP)

refers to output produced by American-owned factors regardless of location.

GDP

refers to output produced within America's borders.

Gross domestic product

refers to output produced within America's borders.

National-income accounting

refers to the measurement of aggregate economic activity, particularly national income and its components.

The income received by the households and businesses that supply property resources is called

rent

the main reason to participate in the underground economy is to avoid

reporting actual income and paying income taxes

consumers are free to divide their income between consumption and ____

saving

Price

serves as a measure of value for calculating total output of a product

60% of personal consumption expenditures are on

services

More abundant leisure increases ____, but it ____ real GDP

social welfare; decreases

Foreign goods purchased by American consumers, firms, or governments should be ____ GDP because the goods were produced outside the United States.

subtracted from

Foreign goods purchased outside of the country should be

subtracted from GDP

Gross Domestic Product (GDP) defines aggregate output as

the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.

The flow of income is the idea that

the dollar value of output will always equal the dollar value of income

Gross investment is:

the total amount of investment purchases in a given time period

stock of capital

the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.

the use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because

the value of money itself changes

Real GDP is gross domestic product measured

to reflect changes in the price level

Chain-weighted indices

use a moving average of price levels in consecutive years as an inflation adjustment.

chain-weighted indexes

use a moving average of price levels in consecutive years as an inflation adjustment.

The increase in the market value of a product that takes place at each stage of the production process is called:

value added

The market value of a firm's output minus the value of the inputs the firm has bought from others is called

value added

Government transfer payments include all of the following except

wage payments to police officers

To calculate real GDP

we adjust the market value of goods and services for changing prices.

Depreciation is the annual amount allocated to

wear and tear on private investment

The GDP identifies the mix of output a country has selected, which also answers the question of ____ to produce.

what

The GDP accounts also tell us what mix of output we've selected

—that is, society's answer to the core issue of WHAT to produce.