Macroeconomics Exam #4 Pt. 1

Laureate Robert Lucas on GDP:

"I do not see how one can look at figures like these without seeing them representing possibilities. Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what exactly? If not, what is it about the "nature of India" that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think about anything else."1

George Box once said

"all models are wrong, but some models are useful."

If you sell ten cars made in 2018 for $30,000 each, the contribution to 2018 GDP is ___________________.

$300,000

Mercedes spends $500 on tires that they then put on a car they sell for $40,000. GDP therefore increases by

$40,000

The largest component of GDP is

Consumption

GDI Factor Income Approach (Income Approach)

Employee Compensation (worker's income) + Rent (landords incomes) + Interest (lenders' income) + Profit (entrepreneurs' incomes)

Gross Domestic Product counts non-market household production.

FALSE

The market value of all finished goods and services produced in a country in a year is ________________.

Gross Domestic Product

In practice, "Gross Domestic Income" and "Gross Domestic Product" differ ever so slightly.

TRUE

Services are

actions

Law of diminishing marginal returns

adding capital increases output, but at a decreasing rate. when there is an open and competitive market, it ceases to be a constraint

GDP only counts

production

GDP can go up because of ___________________.

rising output and/or rising prices

Your parents sold your childhood house. is it included in the US GDP this year?

No, this is considered a used good and reselling a used good does not count towards US GDP.

Without market prices, there is no easy or agreed-upon way to count the value of things like polar bears.

TRUE

finished good or final good

good that is ready for the end user

What happens when markets are open?

people have liberty and dignity to innovate

Goods

tan

Goods are

tangible

market value

the price at which property would sell

An increase in GDP could mean

- a country is producing the same goods and services, but prices have risen. - a country is producing more goods and services. - a country is producing more goods and services and prices are higher.

Real GDP

- the production of goods and services valued at constant prices - it is adjusted for inflation - removes the effects of price changes - fluctuates around a long-run trend

Nominal GDP

- the production of goods and services valued at current prices - has not been adjusted changes in prices

In 2015, your professor bought a house that was built in 1920. The house was counted in _______________________.

1920 GDP

A French student in Canada buys an Australian Football League jersey that was manufactured in the United States. The jersey is counted as part of ______________ GDP.

American

Accounting identity

Assets = Liabilities + Owner's Equity

Capital goods

Buildings, machines, technology, and tools needed to produce goods and services.

GDP National Spending Approach (expenditure approach)

Consumption + Investment + Government + Exports - Imports

A capital good is NOT counted as part of GDP because it will be sold again as part of another good.

FALSE

Carson makes his bed in the morning and cleans his room at the end of the day. These are valuable services that get counted in GDP.

FALSE

Chick-fil-a buys chicken with which to make chicken sandwiches. The chicken is counted as part of GDP.

FALSE

Consumption, government purchases, and investment are affected by similar forces.

FALSE

For his senior project in high school, one of your professor's classmates restored a vintage tractor to prime working condition. When he sold the tractor, it was counted in GDP.

FALSE

Goods Americans produce and then sell abroad are not counted as part of US GDP.

FALSE

If Alpha and Omega have the same GDP, then they have the same standard of living.

FALSE

If John Deere builds a tractor, it will NOT be counted as part of GDP because it will be sold again as part of another good.

FALSE

If a good will be SOLD AGAIN as part of another good, it is still counted as Gross Domestic Product.

FALSE

If two countries have the same real GDP per capita, then they have the same fraction of their population living in extreme poverty.

FALSE

Mercedes buys tires that they put on the cars they sell. These tires are counted as part of GDP.

FALSE

Nominal GDP in China for 2018 has been estimated at $14 trillion. Nominal GDP in the US for 2018 has been estimated at about $20 trillion. Standards of living in China are on the verge of catching up with standards of living in the US.

FALSE

Real GDP Per Capita accounts for the distribution of income.

FALSE

Your grandmother's Social Security check is reflected in the "government purchases" component of GDP.

FALSE

A student from Australia buys a hot dog at a Samford baseball game. The hot dog is counted in Australian GDP.

FALSE, The baseball game is in the US.

To be considered part of Gross Domestic Product, a good or service has to be ______________________.

Finished

produced goods

Goods manufactured by a country.

Your friend bought you a gaming console but it was manufactured overseas, is it included in the US GDP?

NO!

What is the difference between Gross Domestic Product and Gross Domestic Income?

NOTHING, they are the same

Which of the following is not a component of GDP according to the factor income approach?

Net Exports

An increase in the quantity and quality of goods and services is ________ GDP Growth.

Real

Real GDP/Country Population =

Real GDP Per Capita

Due to inflation, a measured increase in real GDP will be __________ than a measured increase in nominal GDP.

Smaller

"Output" is useful because when we produce more we can buy more of the things that really matter.

TRUE

A capital good is a good that is used to produce another good.

TRUE

A little before this writing your professor got his hair cut at Wheelhouse Salon. This transaction was a finished service that will be counted in GDP

TRUE

Allie buys chicken with which to make chicken sandwiches for her friends. The chicken is counted as part of GDP.

TRUE

As average per capita income increases, we tend to see increases in the incomes of the very poor.

TRUE

Economists use GDP to measure the growth of an economy over a period of time.

TRUE

GDP Per Capita is correlated with happiness.

TRUE

GDP Per Capita is correlated with life expectancy

TRUE

GDP Per Capita is correlated with the UN Human Development Index.

TRUE

Goods produced in foreign countries are NOT counted as part of US GDP.

TRUE

Gross Domestic Product does not account for pollution.

TRUE

If a good is not bought or sold in a market, it is not typically counted in GDP.

TRUE

If it were easy to buy and sell polar bears in markets, then polar bears could be included in GDP.

TRUE

In definitions of GDP, we will use "final goods and services and "finished goods and services" interchangeably.

TRUE

In theory, "Gross Domestic Income" and "Gross Domestic Income" are exactly equal.

TRUE

The components of the national spending approach include consumption, investment, government purchases, and net exports.

TRUE

You buy a hot dog at a Samford baseball game. The hot dog is counted as part of US GDP.

TRUE

ne rule of thumb economists use is that there is a "recession" when there are __________________ consecutive quarters of declining GDP.

TWO

Total Market Value

The unit of measure for real domestic output or real GDP is the market value or $

Mercedes is a German company with a large factory in Alabama. A car produced by Mercedes in Alabama counts as _______________________.

US GDP

Your friend bought you a candle from Target. Is it included in the US GDP?

Yes, this is a final good made in the US and sold this year.

Real GDP per capita _______ during recessions.

declines

Net Exports

exports - imports

intermediate goods

goods used in the production of final goods

Declines in real GDP tend to be accompanied by _________ in unemployment.

increases

Per capita GDP is imperfect why?

it is an imperfect measure of a country's standard of living because it doesn't account for inequality.

Gross Domestic Product (GDP)

the market value of all finished goods and services produced in a country in a year. These goods and services are consumed, they are invested, they are bought by governments, and they are exported to foreigners.