Chapter 7: Measuring Output and National Income

Private domestic investment expenditures consist of:

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

__________ goods are included in the calculation of GDP while __________ goods are not included.

Final; intermediate

Which of the following is equal to net investment?

Gross investment minus depreciation

__________ consists of the money paid by private businesses to the suppliers of loans used to purchase capital.

Interest

Which of the following measures the economy's overall performance?

National income accounting

__________ GDP uses current prices while __________ GDP uses prices adjusted for inflation.

Nominal;Real

__________ transfer payments are excluded from GDP because they produce no output and are simply a transfer of funds from one private individual to another.

Private

The three domestic sectors of the economy are households, government, and __________.

firms

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

Net domestic product is gross domestic product less:

depreciation

The amount of income that households have left over after paying their personal taxes is:

disposable income

Net exports is exports minus __________.

imports

Nominal GDP measures the value of all goods and services:

in current dollars

Viewing GDP in terms of earning derived or created by producing something is called the __________ approach.

income

Viewing GDP in terms of earnings derived or created by producing something is called the __________ approach.

income

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

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

value added

The real-world, more complex GDP price index used in the United States is called the chain-type annual __________ price index.

weights

When gross investment and depreciation are equal, the value of net investment is __________.

zero

Which of the following are the domestic sectors of the U.S. economy?

(1) U.S. businesses (2) U.S. households (3) U.S. Government

According to the International Monetary Fund, which three countries had the highest GDPs?

(1) United States (2) China (3) Japan

What is the agency that compiles statistics about the economy?

Bureau of Economic Analysis

Which of the following is the largest component of national income?

Compensation of employees by firms

Secondhand sales are excluded from the calculation of GDP because they:

are not produced in the current year

Gross Domestic Product (GDP) may be calculated as the sum of

consumer spending, investment spending, government purchases of goods and services, and exports minus imports

Gross domestic product calculations count only final goods and services because:

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

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

decreased; increased

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

end up in inventories and are included in investment

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

express the values of products in a common unit of measurement

Consumption goods, capital goods and services purchased by their ultimate users are called __________ goods.

final

Goods and services that are used up in the production of final goods are called __________ goods.

intermediate

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

The three types of domestic investment include all final purchases of machinery, equipment, and tools; all construction; and changes in business __________.

inventories

When gross investment is __________ depreciation, net investment is negative.

less than

Economists compare the __________ value of the total output in various years, rather than volumes of production.

market; actual

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

national

When dealing with international trade, economists include __________ as a component of GDP.

net exports

The difference between the income Americans earn abroad and the income they earn in the United States is called __________ __________ factor income.

net foreign

GDP may be understated because

nonmarket activities are not included in GDP

Transfer payments are excluded from government purchases in GDP accounting because

nothing is being produced in return for the payment

The amount of income that households receive, whether earned or unearned, is called:

personal income

Disposable income equals:

personal income minus personal taxes

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

reporting actual income and paying income taxes

Undistributed corporate profits are called __________ __________.

retained earnings

Consumers are free to divide their income between consumption and __________.

savings

The __________ costs of negative gross domestic by-products reduce a nation's __________ well-being.

social; economic

Consumption of fixed capital is the __________ charge made against private and publicly owned capital each year.

depreciation

Gross rental income minus __________ equals net rent.

depreciation

According to McConnell, the value of underground transactions in the U.S. is between __________ and __________ percent of recorded GDP.

five; ten

The purpose of retained earnings is to save money for:

future investments in capital

The term that covers all expenditures by households is __________ __________ expenditures.

personal consumption

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

produced outside

A country's exports are included in GDP when the goods and services are:

produced within the borders of said country

Government __________, officially labeled "government consumption expenditures and gross investment," include all federal, state, and local government outlays on final goods.

purchases

The amount accountants add to national income to make the income approach match the outcome of the expenditures approach is called the __________ discrepancy.

statistical

Which of the following are part of taxes on production and imports?

(1) custom duties (2) business properties taxes (3) license fees (4) excise fees (5) general sales taxes

Real GDP is gross domestic product measured

to reflect changes in the price level

Social Security payments, welfare payments, and veterans' payments that the government makes directly to households are called government public __________ payments.

transfer

The sale of __________ is excluded from the calculation of GDP because they contribute nothing to current production.

used goods

Select all of the benefits of national income accounting.

(1) Enables formulation of policies to improve or safeguard the economy's health (2) Tracks the long-run course of the economy (3) Assesses the health of the economy

What of following are components of government purchase in GDP?

(1) Expenditures for publicly owned capital (2) Expenditures for goods and services that the government consumes in providing public services

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

(1) Multiple the current year's output by price of the output in the base year (2) Nominal GDP divided by the price index

After calculating national income, which of the following is added to national income to obtain GDP?

(1) Statistical discrepancy (2) Consumption of fixed capital

A price index:

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

National income accountants subdivide corporate profits into which categories?

(1) corporate income taxes (2) dividends (3) undistributed corporate profits

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

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

The following items comprise national income:

(1) proprietors' income (2) corporate profits (3) taxes on production and imports (4) rents (5) compensation of employees (6) interest (7) American salaries earned abroad

What are the three categories of personal consumption expenditures?

(1) services (2) durable consumer goods (3) nondurable consumer goods

For the purposes of GDP accounting, government purchases include __________.

(1) the purchase of new military equipment (2) spending on highway construction

A final good is

(1) counted as part of GDP (2) a good directly consumed by individuals or businesses

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

It understates our well-being

__________ __________ consists of net income of sole proprietorships, partnerships and other unincorporated businesses.

Proprietor's income

__________ is the income received by households and businesses that supply property resources.

Rent

Which of the following is not included in investment spending in the national income accounts?

The purchase of stocks and bonds

True or false: GDP only counts final goods and services to avoid multiple counting of goods.

True

The primary measure of the economy's performance is its annual total output of goods and services, which is called its:

aggregate output

GDP does not reveal if the current product mix of goods and services is enriching or potentially detrimental to society because:

all products are assigned the same weight if they sell for the same price

Aggregate output is the primary measure of the economy's:

annual total output of goods and services

Depreciation of capital is __________.

the annual amount allocated to wear and tear on private investment

Depreciation of capital is __________..

the annual amount allocated to wear and tear on private investment.

In national income accounts, value added refers to:

the difference in the market value and the cost of inputs purchased from other firms

The formula for calculating a price index is

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