Ch 12 Alexi Econ
If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline
Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall.
Why qualify the statement about GDP as a summary statistic by including the phrase "or seems to"?
As a summary statistic, GDP overlooks some areas of production that take place in an economy
An article in the Wall Street Journal states that a change in inventories "dragged down the overall growth in GDP by nearly a full percentage point" below what it otherwise would have been. For this result to occur, is it likely that inventories increased or decreased? Briefly explain.
Decreased, since inventories are part of a firm's investment, which is a component of GDP, inventories must have fallen.
If you were attempting to forecast the level of consumer spending by households, which measure of total production or total income might be most helpful in making your forecast?
Disposable personal income This is the correct answer.
The purchase of wheatwheat from a wheat farmera wheat farmer by a bakerya bakery. Is not the purchase of a final good 2. The purchase of a new fire trucka new fire truck by the locallocal government. Is the purchase of a final good 3. The purchase of FrenchFrench wine by a U.S.U.S. consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good
FINAL GOOD
GDP is an imperfect measure of economic well-being because it fails to measure what types of production?
Household production and the underground economy.
Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income?
National income will remain the same . Personal income will remain the same . Disposable personal income will decrease
An article in the Economist states that "the appeal of GDP is that it offers, or seems to, a summary statistic of how well an economy is doing." In what sense does GDP offer a summary statistic of how well an economy is doing?
Since GDP measures how much an economy produces during a period of time, it may also indicate well-being.
Which equation represents the relationship between GDP and the four major expenditure components
Y = C + I +G +NX
In the United States, the difference between GNP and GDP is smaller than that of many other countries.
smaller
Real GDP is
the value of goods and services evaluated at base year prices.
The Nigerian National Bureau of Statistics accomplished the task of giving these sectors their due weight by
updating the year it used to measure real GDP from 1990 to 2010 and significantly increasing the number of businesses it surveyed.
Ireland is one of the few countries where GDP and GNP differ dramatically. Using GDP per person, Ireland has the third highest income per person in Europe. An article on the Financial Times website states that: "With GDP being about 20 percent larger than GNP, Irish people appear (when using GDP per person) to be richer than what they feel they are." Briefly explain the author's reasoning.
A significant portion of production in Ireland is by foreign-owned firms, which makes the Irish people appear to be richer than they feel they are.
How does real GDP deal with the problem inflation causes with nominal GDP?
ALL Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. B. Real GDP separates price changes from quantity changes. C. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced
Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value?
ALL 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. B. When we measure total production, we can't just add together the quantities of every good and service because the result would be meaningless. C. Measuring production using market value in dollar terms allows us to add together many different goods and services.
Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being
ALL The value of leisure is not included in GDP. B. GDP is not adjusted for crime or other social problems. C. GDP is not adjusted for pollution and it does not account for unequal income distribution.
"If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."
Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
Why would we expect firms in the informal sector to be so much smaller than firms in the formal sector
Because firms in the informal sector are operating illegally, they have less capital than firms operating legally
The figure shows the values of the components of GDP for the year 20162016. Based on the data shown, which of the following statements regarding the components of GDP is false?
Consumer spending on services is less than the sum of spending on durable and nondurable goods
Which of the following is true about the consumption component of U.S. GDP in 2016?
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
What are the four major categories of expenditure?
Consumption, investment, government purchases, and net exports
Indicate whether you agree or disagree with the following statements. "If nominal GDP is less than real GDP, then the price level must have fallen during the year."
Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.
Whenever real GDP declines, nominal GDP must also decline."
Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.
Indicate whether you agree or disagree with the following statement: "In years when people buy many shares of stock, investment will be high= and, therefore, so will gross domestic product (GDP
Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.
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.
In the U.S., gross domestic product ( GDP ) and gross national product ( GNP ) are close in value. Under what circumstances would GNP be much larger than GDP?
Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad. Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S.
Why is GDP an imperfect measurement of total production in the economy?
GDP does not include household production or production from the underground economy.
When a significant fraction of domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP.
If Americans still worked 60-hour weeks, as they did in 1890,
GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher
U.S. Gross National Product (GNP) differs from U.S. Gross Domestic Product (GDP) in which of the following ways?
GNP is the value of final goods and services produced by residents of the U.S. GNP considers production that occurs outside the U.S.
How is the GDP deflator calculated?
GPD defaltor = Nominal GDP/ Real GDP x 100
How does the size of a country's GDP affect the quality of life of the country's people?
Generally, the more goods and services people have, the better off they are
Suppose the information in the following table is for a simple economy that produces only the following four goods: shoes, hamburgers, shirts, and cotton. Further, assume that all of the cotton is used to produce shirts.
If the base year is the year 2009, then for 2018 equals $8460 and the real GDP for 2019 equals $8955 b. The (annual) growth rate of real GDP in 2019 is 5.85
Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spent on household production. Based on these findings, what can we predict about total production long dash—whether or not that production is included in the calculation of GDP long dash—in the economy when these workers became unemployed?
If the workers had been paying other people to perform the household activities prior to unemployment, then total production will fall.
Indicate whether the following statement is correct or incorrect. "Corporate profits are much too high: Most corporations make profits equal to 50 percent of the price of the products they sell."
Incorrect: The largest component of gross domestic income is wages, which are about three times as large as profit
What measures besides average number of hours worked and real per capita GDP would you like to have to evaluate the well-being of workers in OECD countries
Indicators of pollution, crime and other social problems, and the distribution of income.
According to most economists, is it a serious shortcoming of GDP that it does not count household production or production in the underground economy?
Most economists would answer "no" because these types of production do not affect the most important use of the GDP measure, which is to measure changes in total production over short periods of time.
According to data on the usafacts.org site, in 2014 the federal government spent $850.5 billion on Social Security payments to retired and disabled people. Is this federal government spending considered production as measured by GDP? Briefly explain
No, because Social Security payments do not result in the production of new goods and services
Can we conclude anything about the well-being of the average German worker versus the well-being of the average worker in the United States from these data? PICTURE
No, because although the German worker earned less per year, they also worked less per year.
Suppose a house is built and sold in the year 2008. If the house is resold in the year 2019, is the value of the house included in Gross Domestic Product . (GDP) for 2019
No. GDP for 2019 includes only production that occurs during 2019.
Nominal GDP The value of final goods and services evaluated at current-year prices. Real GDP The value of final goods and services evaluated at base-year prices.
Nominal GDP The value of final goods and services evaluated at current-year prices. Real GDP The value of final goods and services evaluated at base-year prices.
Which of the following is true about the government purchases component of U.S. GDP in 2016?
Purchases by state and local governments were greater than purchases by the federal government.
As of 2017, 19 countries in Europe have adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Economist, "The euro zone's GDP grew at an annualized rate of around 2% in the first quarter." Is it likely that the article is referring to the growth in nominal GDP or the growth in real GDP? Briefly explain.
Real GDP, because it shows how the economy's overall production of goods and services changes over time.
Suppose that a simple economy produces only the following four goods and services: shoes, hamburgers, shirts, and cotton. Further, assume that all of the cotton is used in the production of shirts. shoe 125 65 ham 110 3 shirt 60 30 cotton 2,200 .75
The Nominal GDP for the year 2019 is $10,255 multiply each qxp then add all
Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic well-being?
The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.
According to research by Rafael La Porta of Tuck School of Business at Dartmouth and Andrei Shleifer of Harvard University, in developing countries, the average firm in the informal sector, or underground economy, employs 4 workers as opposed to 126 workers employed by the average firm in the formal sector. What is the informal sector, or underground economy?
The informal sector is the sector of the economy where production is concealed from the government.
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.
Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
Which of the following are likely to increase the measured level of GDP and which are likely to reduce it?
When the number of people working outside the home decreases, the measured level of GDP decreases . b. When there is a sharp decrease in the crime rate, the measured level of GDP may increase or decrease . c. If higher tax rates cause more people to hide the income they earn, the measured GDP decreases
During a discussion with a reporter, former Microsoft CEO Steve Ballmer discussed the data compiled on the usafacts.org Web site. Ballmer asked if the reporter knew how many people the government employed and provided the answer: "Almost 24 million. Would you have guessed that?" Is local, state, and federal government spending on salaries and benefits for these employees considered production as measured by GDP? Briefly explain.
Yes, because the government purchases component of GDP includes spending on salaries and benefits for government employees
Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2019?
Yes. GDP for 2019 includes the market value of final goods and services. This includes real estate services.
Is the value of intermediate goods and services LOADING... produced during the year included in Gross Domestic Product LOADING... (GDP)? For example, is aluminum used to produce a new mountain bike 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.
You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption Expenditure b. You purchase a 2013 (preowned) Ford Escape Hybrid from a friend. Not included in GDP calculation c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. Not included in GDP calculation d. Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. Net Export Expenditure e. Ford purchases new machine tools to use in its Missouri Escape factory. Investment Expenditure f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant. Government Expenditure
Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP in each of the following situations?
a. In years after the base year, nominal GDP is greater than real GDP. b. In the base year, nominal GDP is equal to real GDP. c. In years prior to the base year, nominal GDP is less than real GDP.
To calculate personal income from national income, which of the following must the BEA do?
add government transfer payments
Household production and the underground economy
are not accounted for in the Bureau of Economic Analysis' estimates of GDP.
If government cannot accurately measure GDP
businesses will not be able to correctly gauge the market, and the government will be unable to design efficient tax policies.
An underground economy involves all of the following except
buying and selling of goods and services by obtaining a permit from the government
Which of the following do we subtract from GDP to obtain national income?
depreciation
An article in the Economist on the revisions to Nigeria's GDP commented, "The GDP revision is not mere trickery. It provides a truer picture of Nigeria's size by giving due weight to the bits of the economy, such as telecoms, banking and the Nollywood film industry, that have been growing fast in recent years." The phrase "giving due weight" to the sectors of the economy that have been growing quickly means that analysts
developed better measures of those sectors of the economy, which then allowed for better GDP estimates.
An article in the Wall Street Journal noted that many economists believe that GDP data for India are unreliable because "most enterprises are tiny and unregistered, and most workers are employed off the books. The government's infrequent surveys represent only a best guess of the value being added in back-alley workshops, outdoor markets and other cash-based corners of the economy." Working "off the books" refers to
earning income that is not reported for tax purposes.
In the circular-flow diagram, who supplies factors of production in exchange for income?
households
The more comprehensive approach used to calculate GDP provides a truer picture of the size of Nigeria's economy because
it resulted in the initial GDP estimate for 2013 almost doubling in size.
If prices rise over time, then real GDP will be
larger than nominal GDP in years before the base year
In an economy with rising prices, compared to the base year,
nominal GDP is larger than real GDP in years after the base year
Some countries have larger underground economies than do other countries, because
of government policies that are retarding economic growth.
Disposable personal income is equal to
personal income minus personal tax payments
If the GDP deflator in 2012 has a value of 98.0, then
prices have decreased 2 percent between the base year and 2012
Over time, prices may change relative to each other. To take this change into account, the Bureau of Economic Analysis calculates
real GDP using chain weights.
In calculating GDP, which levels of government spending are included in government purchases?
spending by federal, state, and local governments
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
An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last year, she purchased $5,000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for $800 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of $1,000 each
total value added of the artist is 3000
The difference between the price the firm sells a good for and the price the firm paid other firms for intermediate goods is called
value added
In 2016, the largest component of gross domestic income was
wages
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.
Briefly explain whether you agree with this definition of GDP.
Disagree, because GDP measures the value of all final goods and services produced in an economy, not all the goods and services produced
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.
Which of the following is not a shortcoming of GDP as a measure of well-being?
GDP only counts final goods and services and not intermediate goods
All of the following are correct except Which component of gross domestic income is the largest?
Gross domestic income does not include health insurance benefits received by the employees. wages
The table and figure show GDP measured in terms of the total income received by households. Use the table and figure to help determine which of the following statements about the division of income is false.
Gross domestic income is measured precisely
An article in the Wall Street Journal discussed the views of Canadian Minister of Finance Joe Oliver on the effect of falling oil prices on the Canadian economy. According to the article, Oliver argued that "lower oil prices would have a broadly neutral impact on real ... gross domestic product, but have a negative effect on nominal GDP." Oliver must be expecting the effect of lower oil prices to
lower the inflation rate, which would offset the reduction in nominal GDP.
The problems of small firms working off the books and far from major cities would make it difficult for the Indian government to accurately measure GDP because the
measures of GDP will be understated if these practices are common. Your answer is correct.
Which of the following is included in the economist's definition of investment
the purchase of new machines, factories, or houses