Econ 200: Chapter 15-Gross Domestic Product

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, $54,000

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, Value added

Price Level

Measure of average overall prices of goods and services in the economy; Consumer Price Index (CPI) measured on a monthly basis by Bureau of Labor Statistics (BLS)

RGDP vs NGDP

-NGDP calculated with current-year prices-estimated at current prices -RGDP calculated with base year prices-estimation is made at constant prices. -both are considered financial metrics for evaluating country's economic growth and development.

Consumption

-spending by households on goods and services, not including spending on new houses (which are counted instead in investment). -the largest part of GDP - further divided into expenditure on services, durable goods, and nondurable goods

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.

B, short-run fluctuations in RGDP

What is included in GDP?

Includes: 1. consumption + investment + government purchases + (exports - imports). Excludes: 2. Sales of goods that were produced outside our domestic borders 3. Sales of used goods 4. Illegal sales of goods and services (which we call the black market) 5. Transfer payments made by the government 6. Intermediate goods that are used to produce other final goods

Disposable Personal Income

-Personal income minus tax payments Amount that households are able to spend on consumption of goods and services or to save

Intermediate Goods

-goods which are used either for resale or for further production in the same year. - goods purchased for resale -goods used for further production -example: milk purchased by a Dairy Shop -generally purchased by one production unit from another -production and remain within the production boundary

Deflation

-occurs when too many goods are available or when there is not enough money circulating to purchase those goods. -For instance, if a particular type of car becomes highly popular, other manufacturers start to make a similar vehicle to compete. Soon, car companies have more of that vehicle style than they can sell, so they must drop the price to sell the cars. -leads to layoffs -Unemployed individuals do not have enough money available to purchase expensive items

GDP per capita

-tells us the average income (via average production) of the typical citizen -GDP/total population

For each of the following transactions that occur in their lives, identify whether it is included in the calculation of U.S. GDP as part of consumption (C), investment (I), government purchases (G), exports (X), or imports (M). 1. The state of Pennsylvania repaves highway PA 320, which goes through the center of Swarthmore. 2. Darnell's employer assigns him to provide consulting services to an Australian firm that's opening a manufacturing facility in China. 3. Eleanor gets a new video camera made in the United States. 4. Darnell buys a sweater made in Guatemala. 5. Jacques buys a new set of tools to use in his plumbing business.

1. G-government purchase 2. X-exports 3. C-consumption 4. C-consumption, M-imports 5. I-investment

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

A, increases; decreases

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, Spending by federal, state, and local governments

BEA categories

-Business Fixed Investment -Residential Investment -Business Inventories

net exports

exports-imports

GDP Deflator

(nominal GDP/RGDP) x 100

unemployment Rate

-% of labor force actively seeking and unable to find jobs; measured monthly by BLS

The Circular Flow and the Measurement of GDP

-Three methods to calculate GDP: expenditure method, income method, output method

real GDP (RGDP):

0the value of final goods and services evaluated at base-year prices. -in order to make useful comparisons, this is more effective than nominal GDP.

nominal GDP (NGDP):

the value of final goods and services evaluated at current-year prices

Output Method

-Add up production of final goods and services using final market values or by value-added. -To separate these effects, the BEA calculates both (-nominal GDP (NGDP): the value of final goods and services evaluated at current-year prices -real GDP (RGDP): the value of final goods and services evaluated at base-year prices.)

National Income

-GDP minus the consumption of fixed capital Consumption of fixed capital is depreciation or loss of value

Personal Income

-Income received by households, including transfer payments but excluding retained earnings (earnings used to pay off debt or to reinvest)

Market for Factors of Production or Market for Goods and Services

-Market for Factors of Production 1. Amy earns $675 per week working for Rowan and Martin Associates. 2. Van earns $500 per week working for Dinah's Diner. -Market for Goods and Services 1. Amy spends $10 to have breakfast. -EXPLANATION: In this scenario, households sell factors of production such as labor and capital in markets for factors of production when Amy supplies her labor to Rowan and Martin Associates and when Van supplies his labor to Dinah's Diner. Moreover, a firm sells goods and services to a household in markets for goods and services when Dinah's Diner provides the breakfast to Amy and Rowan and Martin Associates provides legal service to Van.

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, included in current period GDP as inventory investment.

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, The Business Cycle Dating Committee

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, an intermediate good

T/F: For the economy as a whole, expenditures must equal income.

True

GDP Deflator

a measure of the price level

Fill in the missing cells in the table to calculate GDP using the expenditure approach. (Billions of dollars) -Consumption (C)=10,215.7 -Investment (I)=1,737.3 -Exports (X)=1,844.4 -Imports (M)=2,356.1 -Net Exports of Goods and Services= (find) -Government Purchases (G) 3,057.5 -Gross Domestic Product (GDP)= (find)

net exports of goods and services=-511.7 GDP=14,498.8 EXPLANATION: net exports=exports-imports gdp= consumption+investment+government purchases + net exports

Microeconomics

the study of how households and firms make decisions, how they interact in markets, industrial organization and how the government attempts to influence their choices.

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth and how government policies impact the overall economy.

Shortcomings of GDP

-useful tool to measure total output in an economy. Many people go further than this, interpreting GDP as a measure of the well-being of citizens. -measure of total production, and in its usefulness as a measure of well-being.

Income Method

-we could measure income to households (wages + rent + interest + profits). -All production must be rewarded with income; so in theory, we could count either in order to calculate GDP. -In practice, data limitations make us unlikely to come up with the same number; there will always be some statistical discrepancy.

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

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, nominal GDP is $500, real GDP is $400.

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, the estimated value of production accomplished at home that never enter a marketplace, such as backyard production of fruits and vegetables.

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, Consumption

price level:

-a measure of the average prices of goods and services in the economy - economists and policy makers are interested in this because stable prices are desirable because they allow households and firms to plan for the future appropriately.

Inflation

-caused when goods and services are in high demand, creating a drop in availability. Consumers are willing to pay more for the items they want, causing manufacturers and service providers to charge more. -Supplies can decrease

Which of the following is included in the economist's definition of investment? A, The purchase of a machine, factory, or house. B, The purchase of a share of stock. C, The purchase of a rare coin or deposit in a savings account. D, All of the above.

A, The purchase of a machine, factory, or house.

Final Goods

-goods which are used either for consumption or for investment. -example: milk purchased by a household -Goods purchased by firms for capital formation or investment -example: machinery purchased by a firm -these are neither resold nor used for any further transformation in the process of production.

Which of these components of income is the largest? A, Wages. B, Rent. C, Interest. D, Profit.

A, Wages

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, U.S. consumption increases by $100, U.S. net exports decrease by $100, and U.S. GDP does not change

Which of the following is true about the US GDP? A, it is calculated and reported once every month. B, it is calculated by the Bureau of Labor Statistics (BLS) which is part of the US Department of Labor. C, it includes both US export and US imports. D, it is defined as the total market value of all final goods and services produced within the boundaries of the country in a given period of time.

D, it is defined as the total market value of all final goods and services produced within the boundaries of the country in a given period of time.

Gross National Product (GNP)

-the total market value of all final goods and services produced during a given period of time by the nation's nationals, regardless of the location of production. -Production performed by citizens of a nation, including overseas production -personal consumption expenditures, private domestic investment+government expenditure+net exports+any income earned by residents from overseas investments-income earned within the domestic economy by foreign residents. --If income earned by domestic corporations outside of the United States exceeds income earned within the United States by corporations owned by foreign residents, the U.S. GNP is higher than its GDP. -does not include intermediary goods and services to avoid double-counting

What would be included and excluded from the GDP?

-Included 1. Awake Cafe, a U.S. coffee company, produces a latte at its location in Minneapolis on January 6, 2017. It sells the latte to a customer immediately. 2. Sofaland, a Swedish furniture company, produces a table at a plant in Virginia on December 14, 2017. It sells the table to a college student on December 24. -Excluded 1. Graincorp, a U.S. agricultural company, produces corn syrup at a plant in Iowa on September 25, 2017. It sells the corn syrup to Crunchy's for use in the production of cereal that will be made in the United States in 2017. (Note: Focus exclusively on whether production of the corn syrup increases GDP directly, and ignore the effect of production of the cereal on GDP.) 2. You chop down a cherry tree on your property in California and make a dining room table in 2017. A similar table sells for $800 in a local furniture store. 3. Roadway Motors, a U.S. automobile company, produces a convertible at a plant in Germany on March 11, 2017. Roadway Motors imports the convertible into the United States on May 29, 2017. -EXPLANATION 4. The Awake Cafe example is straightforward and should clearly count as something produced in the United States in 2017. Each of the other examples is a little more complicated. 5. Although Sofaland is a Swedish company, the table is produced within the United States and should be included in the GDP of the United States. 3. Roadway Motors is a U.S. company, but because it produces the convertible in Germany, the output will be part of the GDP of Germany, not the GDP of the United States. 1. Because Crunchy's uses the corn syrup that Graincorp produces in the production of cereal, the corn syrup is considered an intermediate good, not a final good and, therefore does not directly increase the GDP of the United States. However, the price of the cereal will include the value of the corn syrup. Therefore, the market value of the corn syrup will enter GDP as part of the market value of the final good, the cereal. 2. In theory, the market value of the cherry table should be included in GDP, but because estimating the value of do-it-yourself activities is difficult, such items are generally excluded when the Bureau of Economic Analysis calculates the value of U.S. GDP.

National Income and Product Accounts (NIPA)

-The BEA is charged with performing national income accounting for the United States. Each quarter, it publishes the National Income and Product Accounts tables. -gross national product -national income -personal income -disposable personal income

Real GDP (RGDP)

-The value of final goods and services evaluated at base-year prices.) -real GDP is favored by economists over GDP as a method of measuring economic performance.

Nominal GDP (NGDP)

-The value of final goods and services evaluated at current-year prices

Gross Domestic Product (GDP)

-Total market value of all final goods and services produced within the boundaries of a country, state or region during a specific period of time -Calculated on a quarterly basis; seasonally adjusted -The Bureau of Economic Analysis (BEA), part of the U.S. Department of Commerce -The most common measure used by economists of overall economic activity -GDP has limitations, both as a measure of total production, and as a measure of well-being.

overall economy-level actions

-When we want to study the (blank) of people and governments, the models and tools of macroeconomics become very useful.

Circular-flow model of a simple economy

-households own all the factors of production such as labor and capital -households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. -firms earn revenue when households buy goods and services -EXPLANATION: In the circular-flow model of an economy, households own all the factors of production such as labor and capital. Households earn their income when firms purchase or rent these factors of production to use them to produce goods and services. Firms, in turn, earn revenue when households buy goods and services.

Government purchases

-spending by all levels of the government (federal, state, and local) on goods and service -Does not include transfer payments since those are not a result of current production

Investment

-spending by firms on physical capital (factories, machinery, etc.) and additions to inventories plus spending by households on new houses. -refers only to the purchase of new items, not trades in financial instruments based on those items.

Value-Added Method

-the difference between the cost of inputs to production and the price of output at any particular stage in the overall production process. - At each stage, there is a positive value added, since each producer in the supply chain is able to create output that has a higher market value than its inputs to production.

Net exports

-the value of exports minus the value of imports. -we add up the value of the goods and services sold to foreigners, and subtract off the value of the goods and services sold to Americans by foreigners. -This difference might be positive or negative; in recent years, this has been negative in the United States.

Expenditure Method

-used to measure overall economic activity -we could measure the amount of money that households spend on goods and services -measures four major categories of expenditures: -Y = C + I + G + X - M (-C= Consumption (spending by households on goods and services not including spending on new houses ( which are counted instead in investment)) -I=investment (spending by firms on physical capital (factories, machinery, etc) and additions to inventories plus spending by households on new houses -G= government purchases (spending by al levels of the government (federal, state, and local) on goods and services (doesn't include transfer payments) -NX= net exports (value of exports minus the value of imports))

Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply. 1.The costs of overfishing and other overly intensive uses of resources 2. The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government 3. Funds spent by city governments to renovate their buildings 4. The variety of goods available to consumers

1, 2, 4 EXPLANATION: 2, 4. GDP does not account for off-the-books activities, such as babysitting, which add value to the economy but are not reported to the government. It also doesn't consider the enjoyment households experience as a result of the variety of goods available to consumers. 1. GDP doesn't take into account the costs of overfishing and other overly intensive uses of resources. All of these, though important in measuring the true quality of life within a country, would be far too difficult to measure accurately. 3. Funds spent by city governments to renovate their buildings are accounted for in GDP as government purchases.

Which of the elements of this scenario represent a flow from a household to a firm? 1. Amy's labor 2. The breakfast Amy receives 3. The $350 Van spends to purchase legal service from Rowan and Martin Associates

1. Amy's labor and 3. The $350 Van spends to purchase legal service from Rowan and Martin Associates -EXPLANATION: 1. Amy (a household) supplies her labor to Rowan and Martin Associates (a firm). Therefore, Amy's labor is an input that flows from a household to a firm. 2. The breakfast is provided by Dinah's Diner (a firm) to Amy (a household). Therefore, the breakfast is an output that flows from a firm to a household. 3. Dinah's Diner (a firm) pays Van (a household) $500 for his labor. Therefore, the $500 is a payment that flows from a firm to a household. Van (a household) pays Rowan and Martin Associates (a firm) $350 for legal service. Therefore, the $350 is a payment that flows from a household to a firm.

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, Double Counting

When a U.S. company purchases and imports automotive parts from Canada to use to build cars within the United States, this purchase increases the (blank) component of GDP while also (blank) net exports by the same amount. Therefore, the purchase of automotive parts from Canada causes no overall change Correct in US GDP.

investment; decreases EXPLANATION: When a firm purchases a good or service from abroad, this purchase increases the investment component of GDP. Similarly, if this purchase was made by a household, then the consumption component of GDP would increase. If the purchase was made by the government, then the government purchases component of GDP would increase. However, this transaction has a counterbalancing effect that shows up in the net exports component of GDP. Recall that net exports equal exports minus imports. Because foreign-made goods and services purchased by domestic parties (consumers, firms, and the government) are imports, their value is subtracted from exports and shows up in the GDP calculation as a debit entry (with a minus sign). In this case, because an American company has purchased and imported automotive parts, the investment component increases by the value of the automotive parts. However, since theautomotive parts were imported from Canada, net exports decreases by the same amount (the value of the automotive parts). Although the investment and net exports components of GDP have changed, there is no overall change in GDP.