Measuring Output and Income

Roughly how much of gross domestic product is used for investment?

1/5 or less

Suppose real GDP is roughly $800 billion and the population is approximately 50 million people. Real GDP per capita is $_____

1600

Suppose at the beginning of the year there are ten cranes in the economy. During the course of the year, two cranes wear out and are replaced. At the same time, net investment is equal to two cranes. Gross investment is equal to _____ cranes

4

If business fixed investment is equal to $25 billion, residential investment is equal to $10 billion, and inventories have increased by $8 billion, then gross investment is $_____ billion.

43

Use the prices and output above to answer the question. What is the real GDP for year 2 using year 1 as the base year?

520 To find real GDP in year 2, multiply the quantity of output in year 2 by the prices in year 1. Real GDP = (12 x $5) + (4 x $40) + (3 x $100) = $520

If business fixed investment is equal to $35 billion, residential investment is equal to $15 billion, and inventories have increased by $5 billion, then gross investment is $__ billion.

55

Suppose that at the beginning of the year, there are ten cranes in the economy. During the course of the year, three cranes wear out and are replaced. At the same time, net investment is equal to three cranes. Gross investment is equal to _____ cranes

6

Suppose that in the last year consumers spent $12 billion on durable goods, $34 billion on non-durable goods, and $44 billion on services. Consumption equals $_____ billion.

9

Suppose that in the last year consumers spent $14 billion on durable goods, $35 billion on non-durable goods, and $46 billion on services. Consumption equals $_____ billion.

95

Interest

A fee for the use of money over time; the payment made to agents that lend or save money.

Nominal Gross Domestic Product (GDP)

A measure of GDP in which the quantities produced are valued at current-year prices. Nominal GDP measures the current dollar value of production. Nominal GDP = C + I + G + NX

Real Gross Domestic Product (Real GDP, Y)

A measure of the constant dollar value of all final goods and services produced in a country during a fixed period of time; sometimes called inflation-adjusted GDP. When an economy is in equilibrium, real GDP equals income, Y.

Transfer Payment

A payment made by the government that does not require an exchange of economic activity in return. Transfer payments often take the form of payments to households.

GDP Price Index

A price index based on all the goods and services that are counted as part of gross domestic product. Sometimes called GDP deflator. GDP Price Indext = Nominal GDPt / Real GDPt x 100

Consumption (C)

All expenditures made by households on goods and services, like clothing, food, electronics, and recreation, during a given time period. Consumption = Durable Goods + Nondurable Goods + Services

Government Purchases (G)

All final goods purchased by federal, state, and local governments—such as tanks, police cars, fire engines, and office supplies—during a given time period, as well as all final services purchased from labor resources—such as airport security personnel, police officers, and teachers.

Gross domestic product is equal to the total sum of four categories:

C + I + G + NX (Consumption, gross investment, government purchases, and net exports)

Inventory Investment

Changes in inventories from one year to the next. Inventory investment is positive if firms produce more than they sell; it is negative if they sell more than they produce. When a boat is produced this year but not sold until next summer, it is included in inventory investment in the year in which it is manufactured. When the boat is sold (next summer), that boat will be subtracted from inventory investment.

Suppose Country A has a real GDP per capita of $18,000 and Country B has a real GDP per capita of $24,000. We can conclude that:

Country B is more likely to have a higher standard of living than Country A.

One problem with developing countries is that measures of GDP often underestimate the amount of production that actually occurs. Why is this true?

Developing countries often have relatively large informal markets.

Underground Economy

Economic activity in which goods and services are exchanged for payment but are not counted as part of GDP. Markets that are part of the underground economy that exchange illegal goods and services or engage in illegal transactions are called black markets.

GDP - Income Approach

GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income

Which of the following correctly describes GDP using the income approach?

GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income

Home Production

Goods and services that are produced by a household and are not exchanged in a market.

Final Goods and Services

Goods and services that are sold to the end user and are not used to produce another product for subsequent sale

Intermediate Goods

Goods that are used to build or make another product that will be subsequently sold

Consumer Nondurables

Goods that have an average useful life of less than three years.

Consumer Durables

Goods that have an average useful life of three years or more.

Importants (M)

Goods, services, or resources produced abroad and sold domestically.

Exports (X)

Goods, services, or resources produced domestically and sold abroad.

Suppose that expenditures by the federal government are $40 billion, expenditures by the state governments are $55 billion, and expenditures by the local governments are $20 billion. What is the total of government purchases of goods and services?

Government purchases of goods and services equal $115 billion.

A new restaurant building is constructed in the United States. Which of GDP expenditure categories does this belong to?

Gross Investment

_____ (Exports/Imports) are not counted in nominal GDP because they were produced somewhere else.

Imports

_____ goods are not part of GDP because they are used up in production.

Intermediate

Which of the following statements is true? NX = C + I. NX = X - M. NX = X + M. NX = M - X.

NX = X - M

c. Neil sells illegal drugs. Morgan creates copies of music downloads and sells them.

Neither Neil nor Morgan's transaction is included in GDP.

b. Sam volunteers at the local library tutoring students in math. Laura tutors students in math, but instead of receiving money, parents often make her meals or give her small gifts.

Neither Sam nor Laura's transaction is included in GDP.

Suppose that last year a total of $12 billion in goods and services was exported to other countries while $8 billion was imported.

Net exports equals $4 billion

a. Sean grows vegetables in his garden to make salads for his family. Mike purchases vegetables at a local farmers' market to make salads for his family.

Only Mike's transaction is included in GDP.

Services

Outputs, often intangible, of the direct activities of another person.

Profits and Losses

Payments accruing to owners of entrepreneurial ability.

Wages

Payments made to labor resources.

Rent

Payments made to land resources

Proprietor's Income

Profits and losses earned by individual proprietors.

Corporate Profits

Profits and losses of corporations (as opposed to those of individual proprietors).

Business Fixed Investment

Purchases by firms of new capital goods, such as offices, factories, tools, and machinery.

Resdiential Investment

Purchases of new homes; also includes home improvements.

Real GDP per Capita

Real GDP per person; calculated as real GDP divided by the size of the population. Real GDP per Capita = Real GDP / Population

Indirect Business Taxes

Taxes paid by businesses, such as property taxes, sales taxes, excise taxes, license fees, and tariffs. These taxes are paid by firms and then are passed on to consumers as part of the price of the good or service produced. Indirect business taxes are differentiated from corporate income taxes on business profits.

Depreciation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year.

Net Exports (NX)

The difference between exports (goods made domestically and purchased by foreign consumers) and imports (goods made in other countries and purchased domestically). Net exports equals exports minus imports (NX = X − M).

Net Investment (Inet)

The difference between gross investment and depreciation; represents the net change in the capital stock during a year. Net Investment = I - Depreciation

Net Foreign Factor Income

The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources owned domestically.

Gross Investment (I)

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a given time period. Gross investment is classified into three categories: business fixed investment, residential investment, and inventory investment. Sometimes referred to simply as investment.

Investment

The formation of new productive capital or the expansion of inventories within an economy. Investment occurs either when firms buy goods and services that will enhance productivity and increase output or when they increase their inventories of the goods they sell.

National Income

Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms. National Income = Rent + Wage + Interest + Profits and Losses

All of the following are counted as part of GDP except:

a farmer growing their own food.

In accounting as opposed to economics, depreciation refers to:

a process that spreads the cost of an asset over a number of years.

Consider a piece of machinery that is still in use and highly productive. According to a(n) _____ , that machine could be fully depreciated.

accountant

Using real GDP provides us with a better picture of the economy because it:

allows us to see what is happening to the amount of production over time without price changes skewing our calculation.

RGDP uses current-year quantities and _____-year prices

base

The income approach to measuring GDP measures the total value of all final goods and services in an economy:

based on the income they generate

Increased imports means greater competition from abroad which:

benefits consumers in the form of lower prices

Purchases by firms of new capital goods such as offices, factories, tools, and machinery are called:

business fixed investment

Real GDP per _____ is the same as real GDP per person

capita

If net investment is positive, then the total _____ stock of a country is growing.

capital

The more _____ that is available to its workers, the more productive a nation will be.

capital

_____ depreciates when it becomes obsolete.

capital

When two countries specialize in producing the goods for which they have a(n) _____ advantage and then trade with each other, total production and consumption increase.

comparative

A change in purchasing power can be determined by:

comparing the percentage change in income with the percentage change in the price level

Purchases made by households are called:

consumption

______ includes all expenditures made by households on goods and services such as clothing food electronics and recreation.

consumption

_________ is the largest component of GDP in the United States.

consumption

Gross domestic product is equal to the total sum of:

consumption gross investment government purchases and net exports.

In calculating real GDP, we use:

current year quantities and base year prices

_____ is the amount of capital that is no longer in operation due to wearing out, being used up, or becoming obsolete.

depreciation

Informal-market transactions are especially problematic for:

developing countries in which a large fraction of total production is exchanged in informal markets.

Net exports is the:

difference between goods made domestically and purchased by foreign consumers and goods made in other countries and purchased domestically.

Goods that have an average useful life of three years or more are known as _____ good

durable

Consider a piece of machinery that is still in use and highly productive. A(n) _____ would say that that machine should not be counted in depreciation because it is still part of the productive process.

economist

Markets that are part of the underground economy that engage in illegal transactions are _____ from the calculation of GDP.

excluded

The _____ approach to calculating GDP tells us who bought what; the _____ approach to calculating GDP tells us who earned what.

expenditure, income

Because _____ are produced domestically, they must be included in gross domestic product.

exports

Net exports equals _____ minus _____ .

exports; imports

When GDP is being calculated government purchases include all final goods purchased by the following jurisdictions: _____, _____, and _____ governments

federal; state; local

Only ______ goods and services are included in the estimation of the dollar value of output produced in an economy or nominal GDP.

final

Invisible transactions that happen in an ___________ market will be included in GDP

formal

GDP is not a perfect way to measure economic activity because:

goods and services that are not bought and sold in a market are not included in GDP. it does not account for the depletion of natural resources. it cannot measure the value of leisure time. it ignores activities that occur outside formal markets. it does not account for changes in product quality

Consider the difference between gross and net investment. When businesses replace existing computers with newer models, the newer models constitute _____ investment

gross

Net investment equals:

gross investment minus depreciation

A couple of factors that many would consider most important for the quality of life are:

health and education

Countries with relatively high real GDP per capita tend to have relatively _____ life expectancy and _____ literacy rates

high, highER

Consumption includes purchases made by

households/consumers

Real GDP tells:

how much output was produced in a country whether more was produced in one year relative to another

Referring to the trend in net exports since 1975, the United States has _____ more than it has _____

imported; exported

_____ are not counted in nominal GDP because they are produced somewhere else.

imports

A change in purchasing power can be determined by comparing the percentage change in _____ with the percentage change in the price level.

income

Although we commonly use the expenditures approach to measure gross domestic product, we can also measure GDP by using the _____ approach

income

National _____ is the sum of wages (and other labor compensation), rent, interest, and profits.

income

Real GDP is an imperfect measure of standard of living because it does not report the distribution of _____

income

Whether you use the _____ approach of the _____ approach to calculating nominal GDP, you should arrive at the same number.

income; expenditures

Real GDP measures the dollar value adjusted for _____ of all final goods and services produced in a country during a fixed period of time.

inflation

We can use the GDP price index to calculate rates of _____

inflation

Transactions that happen either as a result of barter or illegally are not included in GDP because they are _____ (tangible/intangible)

intangible

GDP cannot account for:

intangibles such as happiness.

A new house falls under residential _____

investment

In economics, _____ does not solely refer to saving money or buying stocks or bonds.

investment

In economics, the term _____ refers to the formation of productive capital within an economy.

investment

Low or negative _____ growth could be a sign that the economy is headed toward a recession in the near future.

investment

The level of gross _____ does not tell how fast the stock of capital in the economy is increasing.

investment

_____ refers to spending by firms on capital goods designed to improve the future productivity of the firm.

investment

The services of workers, referred to as _______, are counted as intermediate inputs because they are used up in making goods and providing services.

labor

The largest two categories of national income are:

labor and profits

In The United States, imports constitute:

less than 20% of nominal GDP

More imports mean:

more competition from foreign firms.

Investment is the _______ volatile component of GDP.

most

If _____ investment is positive, then the total capital stock of a country is growing.

net

The major difference between nominal GDP and real GDP is

nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices. Correct

The dollar value of all the final goods and services that are produced during a fixed period of time is:

nominal gross domestic product.

By dividing ________ GDP by ______________ GDP, we allow the quantities to cancel out leaving a ratio of prices between the two years.

nominal, real

_____ goods include such goods as food and clothing.

nondurable

Real GDP per capita is calculated by dividing a country's real GDP in a given year by the country's:

population

If inventories are growing, inventory investment is _____ (negative/constant/positive).

positive

Because inflation is generally always _____, _____ GDP tends to always grow faster than _____ GDP

positive, nominal, real

The GDP _____ _____ can be used to track prices from year to year.

price index

The GDP price index can be used to track _____ from year to year

prices

Salaries in the _____ sector are not included in nominal GDP. (Choose from two words: private/public)

private

Using _____ GDP provides us with a better picture of the economy because it allows us to see what is happening to the amount of production over time without price changes skewing our calculation.

real

The dollar value adjusted for inflation of all final goods and services produced in a country during a fixed period of time is called:

real GDP

To calculate _____ _____, multiply the quantities of each good produced in each year by base-year prices.

real GDP

Using _____ GDP together with _____ GDP, we can find out how prices change over time

real, nominal

Secondhand sales represent the:

reallocation of past production that was already counted as part of GDP in another year

Payments made to land resources are called

rent

When firms build houses and sell them to consumers, they contribute to _____ investment

residential

_____ occurs when households or firms take some of their income or profit and put it in a savings account in the stock market or in some other asset, hoping to make a return on their money and spend it in the future.

savings

Sales of ___________ do not represent new production, just the reallocation of past production that was already counted as part of GDP in another year.

secondhand goods

Households now spend more on _____ than they do on durable and nondurable goods which is a change from decades ago.

services

In many states, until recently _____ were not taxed by state governments.

services

_____ are outputs of the direct activities of another person and are often intangible.

services

If an economy exports $15 billion worth of goods and services and imports $8 billion worth, the amount of its net exports is $_____ billion

seven

Suppose that at the beginning of the year, there are ten cranes in the economy. During the course of the year, four cranes wear out. At the same time, we invest in capital and purchase six new cranes. Gross investment is equal to _____ cranes and depreciation is equal to _____ cranes.

six; four

Because imports are not produced domestically, they need to be _____ from gross domestic product.

subtracted

The GDP price index is also called:

the GDP deflator

Nominal gross domestic product measures the dollar value of:

the final goods and services that are produced during a fixed period of time.

The more productive the nation is,:

the higher its wages and standards of living are

Consumption and government purchases are:

the largest components of GDP

Including changes in inventory as part of gross investment guarantees that goods are counted as part of GDP in the year in which:

they are produced, not necessarily the year in which they are sold.

Economists prefer real GDP to nominal GDP because:

they want to measure the actual production that occurred not the current dollar amount of that production.

If the government is giving money to someone so she can buy a good or service, it is a(n) _____ payment and is not included in GDP.

transfer

Social Security payments are considered _____ payments and are not included in GDP.

transfer

It does not matter which year you use as the base year as long as you are consistent. (True or False)

true

Real GDP does not tell you everything you need to know to determine standards of living in a given country. (True or False)

true

The GDP price index measures the broadest possible range of prices in the economy. (True or False)

true

Because informal-market transactions result in increased output produced, GDP _____-estimates the actual amount of output produced in an economy.

under

Because informal market transactions result in increase in output produced GDP ___________ (overestimates/underestimates) the actual amount of output produced in an economy.

underestimates

Markets that are part of the _____ economy that exchange illegal goods and services or engage in illegal transactions are called black markets.

underground or informal

When measuring GDP, we classify expenditures into four categories because:

we like to know who is consuming what