Chapter 8.1 Practice

In calculating GDP, which levels of government spending are included in government purchases?

spending by federal, state, and local governments

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

the purchase of new machines, factories, or houses.

Which equation represents the relationship between GDP and the four major expenditure components?

Y = C + I + G + NX

Indicate whether each of the following transations represents the purchase of a final good. 1. The purchase of cotton fabric from a textile mill by a clothing company. 2. The purchase of two new elementary school buildings by the state government. 3. The purchase of French wine by a U.S. consumer. 4. The purchase of a new machine tool by the Ford Motor Company.

1. Is not the purchase of a final product. Steel is an intermediate good used in the production of cars. 2. Is the purchase of a final product. Government purchases of goods and services are considered final goods. 3. Is the purchase of a final good. When U.S. consumers buy French wine, or when French consumers buy domestic wine, they are purchasing a final good. 4. Is the purchase of a final good. When a firm invests in its own future productivity, economists call this "gross domestic private investment," which is considered a final good.

Which of the following is true about the consumption component of U.S. GDP in 2012?

Consumer spending on services was greater than the sum of spending on durable and nondurable goods.

What are the four major components of expenditures in GDP?

Consumption, Investment, Government Purchases, and Net Exports

Indicate whether you agree or disagree with the following statement: "In years when people buy few shares of stock, investment will be low and, therefore, so will GDP."

Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.

Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value?

E; all of the above. If, in macroeconomics, we measured production using quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by Apple, to gallons of milk, and so on. When we measure total production, we can't just add together the quantities of every good and service because the result would be meaningless. Measuring production using market value in dollar terms allows us to add together many different goods and services.

In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone's income.

What happens if we measure GDP by adding up the value of every good and service produced in the economy?

GDP is overestimated because of double counting.

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods.

Suppose a house is built and sold in the year 2006. If the house is resold in the year 2015, is the value of the house included in Gross Domestic Product (GDP) for 2015?

No. GDP for 2015 includes only production that occurs during 2015.

Which of the following is true about the government purchases component of U.S. GDP in 2012?

Purchases by state and local governments was greater than purchases by the federal government.

According to Dan Sichel, an economist at Wellesley College, the amount of time a singer spends working on a record album in a recording studio is "quite analogous to a factory investing in a new machine." Which of the following statements is correct?

Song development time produces songs, similar to investment in a factory produces physical goods.

An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last year, she purchased $6000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for $900 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of $1100 each.

The total value added of the artist is $3000. 900 x 10 = 9000 9000 - 6000 = 3000

What is the difference between the value of a firm's final product and the value added by the firm to the final product?

The value of a firm's final product is the sale price, value added is the difference between the sale price and the price of intermediate goods.

Would the services of a real estate agent who helped self (or helped buy) the house be included in GDP for 2015?

Yes. GDP for 2015 includes the market value of final goods and services. This includes real estate services.

Is the value of intermediate goods and services produced during the year included in Gross Domestic Product (GDP)? For example, is aluminum used to produce a new mountain bike included in GDP? (Note that this question does not ask whether aluminum is directly counted in GDP but rather whether the production is included in GDP.)

Yes. The value of the aluminum is not directly counted in GDP, but the production of aluminum is included in the value-added method of measuring GDP.

Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company. a. You purchase a new Ford Escape Hybrid from a Ford dealer. b. You purchase a 2011 (preowned) Ford Escape Hybrid from a friend. c. Ford purchases door handles for the Escape from an auto parts manufacturer in India. d. Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. e. Ford purchases new machine tools to use in its Missouri Escape factory. f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant.

a. Consumption expenditure b. Not included in GDP calculation. c. Not included because the product is an intermediate good, not a final good. d. Net Export expenditure. e. Investment expenditure. f. Government expenditure.

In the circular-flow diagram, who supplies factors of production in exchange for income?

households

Total value added is

the difference between the sale price and the price of the intermediate goods used in production.

Gross domestic product is best defined as

the market value of all final goods and services produced in a country during a period of time, typically one year.

The difference between the price a firm sells a good for and the price the firm paid other firms for intermediate goods is called

value added.

An important conclusion to draw from the circular-flow diagram is that

we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of total income.