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EC 302 Chapter 2

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If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP?

$10

Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other farmers for $50,000. The net increase in GDP of these transactions was

$100,000 Only the new tractors are counted toward GDP

In a given year, a country's GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296, interest payments on the government's debt = $103, consumption = $8148, and government purchases = $185. The country had private saving equal to

$2112

$285 Topic: Section 2.3

If C = $250, I = $50, G = $60, NX =− $20 , and NFP = $5, how much is GNP?

$345 GNP= GDP + NFP GDP= C+I+G+NX

The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for $20,000. It pays its workers $35,000, pays $1000 in taxes, and has profits of $3000. What is its value added?

$39,000

The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for $20,000. It pays its workers $35,000, pays $1,000 in taxes, and has profits of $3,000. What is its value added?

$39,000 35,000+1,000+3,000

Sam's Semiconductors produces computer chips, which it sells for $10 million to Carl's Computer Company (CCC). CCC's computers are sold for a total of $16 million. What is the value added of CCC?

$6 million

Sam's Semiconductors produces computer chips, which it sells for $10 million to Carl's Computer Company (CCC). CCC's computers are sold for a total of $16 million. What is the value added of CCC?

$6 million $16 million- $10 million

The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil company's gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil?

$600 million

$600 million -Final good

Expenditure approach

-Economic activity is the total amount of spending by the ultimate purchasers of output. -The expenditure approach adds consumption plus investment plus government spending plus net exports

After a boat rescues everyone else from Gilligan's Island, the Professor and Gilligan remain behind, afraid of getting shipwrecked again with the same bunch of people. The Professor grows coconuts and catches fish. Last year he harvested 1,250 coconuts and caught 1,750 fish. He values one fish as worth two coconuts. The Professor gave 250 coconuts to Gilligan in exchange for help in the harvest, and he gave Gilligan 175 fish in exchange for collecting worms for use in fishing. Gilligan consumed all his coconuts and fish. In terms of fish, the GDP of Gilligan's Island =

2,375 GDP is the value of all final goods and services produced during the year. The items to be included in GDP are the coconuts the Professor grows plus the amount of fish he catches, where the coconuts must be translated into units of fish at the rate of 2 coconuts per fish. GDP equals 1,250/2 +1,750 =2,375.

Consumption accounts for _______ of the GDP in the US

2/3

By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162, but he had thought the CPI would be at 159 by the end of the year. By Marks had expected the real interest rate to be ________, but it actually turned out to be ________.

3%; 1%

If the expected inflation rate was 2.5%, the expected real interest rate was 4.0%, and the actual inflation rate turned out to be 3.2%, then the real interest rate equals

3.3%

If the expected inflation rate was 2.5%, the expected real interest rate was 4.0%, and the actual inflation rate turned out to be 3.2%, then the real interest rate equals

3.3% 2.5+4.0= 6.5- 3.2%= 3.3%

Nominal GDP in 1970 was $1,035.6 billion, and in 1980 it was $2,784.2 billion. The GDP price index was 30.6 for 1970 and 60.4 for 1980, where 1992 was the base year. Calculate the percent change in real GDP in the decade from 1970 to 1980. Round off to the nearest percentage point.

36% Real GDP= Nominal GDP/ GDP price index

If the nominal interest rate on a one−year loan was 7%, the expected inflation rate over the year was 3% and the actual inflation rate over the year turned out to be 3.5%, then the expected real interest rate equals

4% nominal-expected

If the price index last year was 1.0 and today it is 1.4, what is the inflation rate over this period?

40%

If nominal GDP for 2009 is $6400 billion and real GDP for 2010 is $6720 billion (in 2009 dollars), then the growth rate of real GDP is

50% Section 2.4

The consumer price index (CPI) was 180 for 2009 when using 1995 as the base year (1995 = 100). Now suppose we switch and use 2009 as the base year (2009 = 100). What is the CPI for 1995 with the new base year?

55.6

Nominal government purchases were $2226.2 billion in 2008 and rose to $2372.8 billion in 2009. Real government purchases were $1940.6 for 2008 and $1958.0 for 2009, where 2005 was the base year. Calculate the percent change in the chain-weight price index for government purchases (rounded to the nearest percentage point) from 2008 to 2009.

By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the bond was ________, and the real interest rate was ________.

9%; 1%

By Marks buys a one-year German government bond (called a bund) for $400. He receives principal and interest totaling $436 one year later. During the year the CPI rose from 150 to 162. The nominal interest rate on the bond was ________, and the real interest rate was ________.

9%; 1%

Monica grows coconuts and catches fish. Last year she harvested 1500 coconuts and 600 fish. She values one fish as having a worth of three coconuts. She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish, all of which were consumed by Rachel. In terms of fish, Monica's income would equal

900 fish

Which of the following is included in U.S. GDP?

A newly constructed house.

Loretta agrees to lend Ted $500,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 8%. Both expect the inflation rate to be 2%. (a) Calculate the expected real interest rate. (b) If inflation turns out to be 3% over the life of the loan, what is the real interest rate? Who gains from unexpectedly high inflation, Loretta or Ted? (c) If inflation turns out to be 1% over the life of the loan, what is the real interest rate? Who gains from unexpectedly low inflation, Loretta or Ted?

Answer: (a) 8% - 2% = 6%. (b) 8% - 3% = 5%. Ted gains from unexpectedly high inflation, because he repays the loan with dollars that aren't worth as much as was expected. (c) 8% - 1% = 7%. Loretta gains from unexpectedly low inflation, because she gets repaid with dollars that are worth more than was expected.

Which of the following is included in U.S. GDP? A. The purchase of a watch from a Swiss company. B. A newly constructed house. C. The sale of a new car from a manufacturer's inventory. D. The sale of a used car.

B. A newly constructed house

What are the 3 categories of consumption spending?

Consumer durables Nondurable goods Services

In terms of fish, consumption on Gilligan's Island is ___ and investment is ___

Consumption consists of GDP minus investment. Since there is no investment spending, GDP = consumption = 2,375 and investment is 0

a. It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured in North Carolina during the current year.

Consumption increases by $6 billion, and GDP increases by $6 billion.

It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured in Sweden during the current year.

Consumption increases by $6 billion, imports increase by $6 billion, and GDP does not change.

How to calculate Real GDP

Current quantity x Base year prices

Income approach

Economic activity is the total amount of income received by the producers of the output Total income = wages + profit + taxes + interest

Which of the following equations describes the government deficit?

G + TR + INT - T

GDP

GNP=

GDP(Y)+NFP

Private Disposable Income formula

GDP+NFP+TR+INT-T

GDP differs from GNP because

GDP = GNP − net factor payments from abroad.

How does GDP differ from GNP?

GNP measures the output of factors of production owned by a nation, while GDP measures production taking place in a nation

How does GDP differ from GNP? (written)

GNP measures the output of factors of production owned by a nation, while GDP measures production taking place in a nation.

In terms of fish, the income of the Professor is ___, and the income of Gilligan is ___

Gilligan's income is easily calculated, as long as you convert to fish. It equals 250/2 + 175 =300. To find the Professor's income, be sure to remember that anything he pays Gilligan is not his income. So the Professor's income = (1,250−250)/2 +(1,750−175) = 2,075. Remember that wages paid and other inputs to production can't be part of the Professor's income.

Which of the following equations describes the government deficit?

G + TR + INT − T

Which of the following is not a category of consumption spending in the national income accounts?

Housing purchases

In the country of Kwaki, people produce canoes, fish for salmon, and grow corn. In one year they produced 5000 canoes using labor and natural materials only, but sold only 4000, as the economy entered a recession. The cost of producing each canoe was $1000, but the ones that sold were priced at $1250. They fished $30 million worth of salmon. They used $3 million of the salmon as fertilizer for corn. They grew and ate $55 million of corn. What was Kwaki's GDP for the year?

Inventories are valued at the cost of production, so the 1000 canoes in inventory were valued at $1000 each, for a total of $1 million. Four thousand canoes at $1250 each totaled $5 million. Salmon as a final good were worth $27 million (the other $3 million were used up as an intermediate good), and corn worth $55 million was grown. So total GDP (in millions) was $1 + $5 + $27 + $55 = $88 million.

It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured in North Carolina during the current year.

Investment increases by $6 billion, and GDP increases by $6 billion.

It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured in Sweden during the current year.

Investment increases by $6 billion, imports increase by $6 billion, and GDP does not change.

GDP Deflator

It is calculated by dividing Nominal GDP by Real GDP and then multiplying by 100

How is national wealth linked to national saving?

National saving is the flow of additions to the stock of national wealth.

What is national wealth?

National wealth is a country's domestic physical assets plus its net foreign assets.

Government Saving formula

Net government income-government purchases (T-TR-INT)-G

GDP deflator=

Nominal GDP/ Real GDP

What is the difference between nominal and real economic variables? Why do economists tend to concentrate on changes in real magnitudes?

Nominal variables are in units of money, while real variables are in physical quantities of output. We measure nominal variables using current market prices and real variables using market prices in a given base year. Nominal variables may increase, but you don't know if the increase is due to higher prices and the same quantity, or a higher quantity with unchanged prices; real variables reflect just quantity changes. For the most part, real variables (consumption, investment, and the capital stock) affect each other in the economy, with lesser roles played by nominal variables (money supply, and price level).

to what extent are homemaking and child-rearing accounted for in the government's GDP accounts?

Only to the extent that they are provided for pay

How to calculate Private Saving

Private disposable income (GDP+NFP+TR+INT-T)-C (consumption)

The uses-of-saving identity shows that if the government budget deficit rises, then one of the following must happen

Private saving must rise, investment must fall, and/or the current account must fall.

Real GDP formula

Real GDP is equal to the sum across all items of the base-year price of each item times quantity of each item. (Base year price used for current year quantities)

What best describes the relationship between saving and wealth?

Saving is a flow into the stock of wealth

Which of the following best describes the relationship between saving and wealth?

Saving is a flow into the stock of wealth.

Net government income (formula)=

T-TR-INT

Given it= 8%, Pt= 110, Pt+1= 118.8, Pet+1= 117.7, calculate the expected real interest rate in period t as a percentage

The expected real interest rate = 1%

The percentage change in nominal GDP formula

The percentage change in nominal GDP is calculated as [(current nominal GDP minus− base year GDP)/base-year GDP] times × 100%

Real interest rate formula

The real interest rate equals the difference between the nominal interest rate and the actual rate of inflation nominal-actual= real

Why are imports subtracted when GDP i calculated in the expenditure approach?

They are produced abroad, and GDP only counts domestic production

Why are imports subtracted when GDP is calculated in the expenditure approach?

They are produced abroad, and GDP only counts domestic production.

Why is national wealth important?

The long-run economic well-being of a country depends on wealth.

The income—expenditure identity says that

Y = C + I + G + NX

Private disposable income (formula)=

Y+NFP+TR+INT-T

Product approach to calculating GDP

adds together the market values of FINAL goods and services produced by domestic and foreign-owned factors of production within the nation in some time period (economic activity is the amount of output produced, excluding intermediate stages of production)

The product approach to calculating GDP

adds together the market values of final goods an services produced by domestic and foreign-owned factors of production within the nation in some time period

The product approach to calculating GDP

adds together the market values of final goods and services produced by domestic and foreign-owned factors of production within the nation in some time period.

Real GDP is a better measure of economic growth than nominal GDP because

an increase in nominal GDP may show an increase in prices rather than an increase in output

Real GDP is a better measure of economic growth than nominal GDP because

an increase in nominal GDP may show an increase in prices rather than an increase in output.

Larry's Lathe-makers Limited produces lathes, which are purchased by furniture manufacturers all over the world. The standard lathe depreciates over a twenty-five-year period. In the national income accounts, the lathes are classified as

capital goods

The CPI may overstate inflation for all the following reasons except

changes in Social Security benefits.

The components of total spend are

consumption, investment, government spending, and net exports

The components of total spending are

consumption, investment, government spending, and net exports.

Private saving is equal to

disposable income minus consumption (GDP+NFP+TR+INT-T)-C

Private saving is equal to:

disposable income minus consumption.

National wealth is equal to

domestic physical assets plus net foreign assets.

capital goods are

final goods, because they are not used up during a given year

What is not a use of an economy's private saving?

financing consumption

Which of the following is not a use of an economy's private saving?

financing consumption

Saving is a ______ variable

flow

saving is a ___ variable

flow

National saving is equal to

government saving plus private saving ((T-TR-INT)-G)+((Y+NFP-T+TR+INT)-C) also GDP+NFP-C-G

National saving is equal to:

government saving plus private saving.

Net national product equals

gross national product minus depreciation.

Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries

have a large number of citizens working abroad.

Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries

have a large number of citizens working abroad.

If a country employs many foreign workers, GDP is likely to be _________ GNP

higher than

If a country employs many foreign workers, GDP is likely to be _________ GNP.

higher than

Marvin's Metal Company produces screws that it sells to Ford, which uses the screws as a component of its cars. In the national income accounts, the screws are classified as

intermediate goods

Marvin's Metal Company produces screws that it sells to Ford, which uses the screws as a component of its cars. In the national income accounts, the screws are classified as

intermediate goods

In 2008, inflation exceeded expected inflation. In 2009, expected inflation exceeded inflation. Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.

less; greater

NFP=

net factor payments from abroad

INT=

net interest payments on the government's debt

Private saving is defined as

private disposable income minus consumption

The three approaches to measuring economic activity are the

product, income, and expenditure approaches

For the purpose of assessing an economy's growth performance, the more important statistic is

real GDP

For the purposes of assessing an economy's growth performance, the more important statistic is

real GDP

Historical analysis of real interest rates in the United States shows that

real interest rates were unusually low in the 1970s and unusually high in the 1980s.

If a local government collects taxes of $500,000, has $350,000 of government consumption expenditures, makes transfer payments of $100,000, and has no interest payments or investment, its budget would

show a surplus of $50,000.

Wealth is a ______ variable

stock

wealth is a ___ variable

stock

taxes

What are the three approaches to measuring economic activity?

the income approach, the expenditure approach, and the product approach

TR=

transfers received from the government

The value of a producer's output minus the value of the inputs it purchases from other producers is called the producer's

value added

In 2008, expected inflation exceeded inflation. In 2009, inflation exceeded expected inflation. Therefore the real interest rate was ________ than the expected real interest rate in 2008 and the real interest rate was ________ than the expected real interest rate in 2009.

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