Chap 7 questions I found

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

Define net exports.

exports - imports

Nominal GDP

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

Final Goods

goods and services that have been purchased for final use and not for resale or further processing or manufacturing Example Wool Suit

Define the four categories of expenditures which comprise GDP.

(1) Personal consumption expenditures including consumer spending on durable goods, nondurable goods, and services; (2) gross private domestic investment which includes business purchases of machinery, equipment and tools, business and residential construction, changes in business inventories; (3) government purchases of goods and services that government consumes in providing goods and services, excluding government transfer payments, and expenditures for publicly owned capital; (4) the value of net exports which is the value of exports of goods and services minus the imports of goods and services.

The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.

(a) GDP $462; (b) NDP $458; c) NI $433; (d) PI $379; ( e) DI $341; (f) Net exports −$3.

Characteristics of GDP

1) Consumption; 2) Investment; (business spending on eqpt for ex) 3) Government Spending; 4 ) Net Exports.

Of what use is national income accounting to economists and policy makers?

1) it gives us a measure of the state of the economy at a particular point in time. 2) it permits us to track the condition of the economy over time to see whether it has grown or stagnated. 3) it provides the basis for making economic policy decisions. [

State an equation for the two main uses of disposable income.

Disposable income (DI) can either be used for consumption (C) or saving (S), thus DI = C + S.

How does the personal income measure differ from the disposable income measure?

Disposable income is spendable income after personal taxes have been subtracted from personal income.

How do you calculate personal income from national income?

First, you start with the national income measure and subtract income that is not distributed to households. The subtraction would include taxes on production and imports, Social Security taxes, corporate income taxes and undistributed corporate profits. Then you add transfer payments, such as Social Security payments, unemployment payments, disability payments, welfare payments or private pension fund payments. These calculations give you personal income.

How would the value of output produced at an American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated in GDP accounting?

GDP is a measure of the total market value of all final goods and services produced within the borders so BOTH would be included

Explain what is and what is not included in government purchases in GDP.

Government purchases are government expenditures for goods and services the government consumes in producing public goods. These expenditures are for final goods and all direct purchases of resources such as labor. It also includes expenditures for publicly owned capital such as highways and schools that have a long life. What is not included are government expenditures for transfer payments such as Social Security or welfare because these expenditures generate no production.

Give the three categories which comprise gross investment and explain the differences among them.

Gross investment includes (1) all final purchases of machinery, equipment, and tools by businesses; (2) all construction including residential; (3) changes in business inventories. The first group restates the definition of investment goods; the second item is houses and buildings that can yield an income return; the third group is "unconsumed output" and is therefore part of investment.

What are the components of national income?

National income is divided into compensation of employees (which includes wages and salaries and benefits), rental income, interest income, proprietors' income (the income of sole proprietorships and partnerships), corporate profits, and taxes on production and imports.

Why do economists worry about "multiple counting" and calcualte only the "value added" in the production process?

Only the value of final goods is included in the calculation of GDP because that value includes the value of the production of all intermediate goods. To include the value of final goods and all intermediate goods would lead to a multiple counting or overstatement of the size of GDP. To make the GDP calculation, economists only count the "value added" at each stage of the production process. Value added is the market value of a firm's output minus the value of inputs bought from other Chapter 24 firms. Summing the value of the contribution made by each firm at each stage of the production process enables economists to determine GDP.

Explain how a reservoir can serve as an analogy for thinking about a nation's capital stock, investment, and depreciation.

The amount of water in a reservoir is a "stock." It is similar to the stock of capital goods in an economy. The inflow of water to the reservoir is a "flow" and would be similar to gross investment. The outflow of water from the reservoir is also a "flow" and it is similar to depreciation. If the inflow is greater than the outflow, then gross investment is greater than depreciation so there is an addition to the capital stock, or net investment. If the inflow of gross investment is less than depreciation, there is a decline in the capital stock, or negative net investment.

Why is the value of the sales of stocks and bonds excluded from GDP?

The sale of stocks and bonds is simply a change in the ownership of financial assets. The transactions do not create current production and are not included as part of GDP.

What is the value added by all firms A-E from the production of a product as described below? Example 1 What did each firm add separately in the value and what does it total? Example 1

The value added by all firms is $7600, or the final sales value. Firm A: added $1600. Firm B: added $900. Firm C: added $1200. Firm D: added: $1500. Firm E: added $2400. The value added by all firms totals $7600 and equals the final sales value by Firm E ($7600).

Is the United States a service economy? Explain based on the types of personal consumption expenditures.

Yes a case can be made that the United States is a service economy because services account for about 60 percent of personal consumption expenditures. Nevertheless, personal consumption expenditures on the other 40 percent are also important for the economy. Durable goods account for 10 percent and nondurable goods account for 30 percent of personal consumption expenditures. So the U.S. economy is oriented to services, but all three types of personal consumption expenditures are still important.

calculate disposable income from national income,

first follow the calculations that derive personal income. From personal income subtract taxes paid, including personal income taxes, personal property tax and inheritance taxes, and that results in disposable income.

Intermediate goods

products that are purchased for resale or further processing or manufacturing Example Wool sold to suit make by sheep rancher

real GDP

the production of goods and services valued at constant prices

National Income

the total income earned by the factors of production owned by a country's citizens

Describe the three basic types of personal consumption expenditures.

(1) Products that have expected lives of three years or more are durable goods. Examples of these goods would be cars and refrigerators. (2) Products that have an expected life of less than three years are nondurable goods. Examples of these goods would be clothing and food. (3) Work done by others for a person would be considered services. Examples of service providers would be doctors, lawyers, insurance agents, and hair stylists.

Which of the following are included and which are excluded in calculating this year's GDP? Explain in each instance. (a) A monthly scholarship check received by an economics student (b) The purchase of a new truck by a trucking company (c) Government purchase of missiles from a private business (d) The purchase of a used tractor by a farmer (e) The value of the purchase of shares of Microsoft by an individual

(a) Scholarships are not included in GDP. They are viewed as financial transactions and would be either a public or private transfer payment depending on the source of funds. They are awards for past performance and would not be included in current production. They don't represent income earned by providing a productive resource as defined in the GDP accounts. (b) The truck is included because it represents investment. It is a final good that was produced in the current year. (c) The missile purchase is included as part of government spending on goods and services. (d) The used tractor is not included because it was counted when it was new. (e) The value of a stock purchase is not included because it is just a swap of paper assets.

Which of the following are included and which are excluded in calculating this year's GDP? Explain in each instance. (a) An auto mechanic who fixes his own car at home (b) Cash received from selling a corporate bond (c) Spending by a city government on a waste treatment plant Chapter 24 (d) The pleasure that people obtain from working at jobs they like (e) A veteran's payment made to a retired military officer

(a) The work of the mechanic to fix his own car is not included because it is not a market transaction. (b) The buying and selling of bonds is not included because it represents a financial transaction only. (c) This spending would be included as part of government purchases of goods and services and would be included in GDP. (d) This pleasure would not be included in GDP because it is a non-market item and difficult to value. (e) This veteran's payment is not included in GDP because it is a public transfer payment.

Which of the following are included and which are excluded in calculating this year's GDP? Explain in each instance. (a) A homeowner who mows her own lawn (b) A decline in the average hours worked per week (c) Business expenditures on pollution control equipment (d) Income from illegal drug activities (e) The person who purchases a health care product

(a) This lawn mowing work is not included in GDP because it is a non-market transaction. (b) Additions to leisure are not included in GDP calculations. (c) Business expenditures on pollution control equipment would be considered investment and would be included in GDP calculation. (d) The illegal drug income would not be recorded and would not be included in GDP. (e) This consumer purchase would be part of consumption and would be included in GDP.

Which of the following are included and which are excluded in calculating this year's GDP? Explain in each instance. (a) Social Security checks received by a retired person (b) An increase in business inventories (c) The income of a tax accountant working for a business (d) Income received from interest on a corporate bond (e) The cashing in of a U.S. savings bond

(a)A Social Security payment is not included because it is a transfer payment, not payment for current productive services. (b) An increase in business inventories is included as part of business investment. (c) The accountant's income is included because it is payment for productive services (accounting). (d) The income from a corporate bond is included because it is payment for use of capital resources during that year. (e) Cashing a savings bond is not included because it represents a financial transaction only.

What is the relative share of National Income going to wages and salaries and to corporate profits?

72% of national income goes to the wage compensation categories. About an eighth of national income gets paid out as corporate profits (11%).

What adjustments need to be made to go from national income to GDP?

National income shows the amount of income paid as compensation of employees, rents, interest, proprietors' income, corporate profits, and taxes on production and income. This amount will be less than GDP, which shows the total expenditures on all final goods and services. T To get to GDP, three adjustments must be made to national income. First, there is an allocation for the consumption of fixed capital (depreciation) that must be added. Second, a statistical discrepancy is added. Third, net foreign factor income is subtracted. This net foreign factor income is the difference between what foreign-owned

Identify the two major types of nonproduction transactions that are not included in GDP.

Purely financial transactions such as the purchase and sale of stocks and bonds are excluded, and also excluded are public and private transfer payments; and (2) secondhand sales.

Are Social Security payments included in GDP? Explain why or why not.

Social Security payments are considered to be a nonproduction transaction and therefore are not included in GDP. Social Security payments are made by the government to households, but the recipients do not have to contribute to current production to receive these payments.

What is the value added by all firms A-E from the production of a product as described below? Example 2 What did each firm add separately in the value and what does it total? Example 2

The value added by all firms is $32,300, or the final sales value. Firm A: added $4500. Firm B: added $4100. Firm C: added $6100. Firm D: added: $5400. Firm E: added $12,200. The value added by all firms totals $32,300 and equals the final sales value by Firm E ($32,300).

Explain the two different ways of looking at GDP.

There are the expenditure approach and the income approach to looking at GDP. The expenditures approach adds up all the expenditures used to purchase output from the economy by the consumer, businesses, government, and foreigners. The income approach looks at the value of the income that is derived from producing the economy's output such as wages, rents, interest, and profits. Either approach can be used in calculating GDP and will produce the same answer.

Net investment can be positive, negative, or zero, but gross investment can never be less than zero. Explain.

This is true by definition. Gross investment refers to the amount of investment spending on capital goods before allowance is made for depreciation. If any capital spending takes place, then the amount has to be positive. If none takes place, gross investment could be zero, but it could never be less than zero.

How do you calculate disposable income from personal income?

To calculate disposable income from personal income, subtract taxes paid, including personal income taxes, personal property tax and inheritance taxes. The result of the subtraction of taxes from personal income is disposable income.

Why is GDP a monetary measure?

a monetary measure to make it possible to compare the relative worth of a diverse collection of goods and services over time. It is not possible to count the number of goods and compare them because the types of goods change over time. It is possible to count the number of goods and attach monetary values to them to reflect their relative worth and then compare the value of the output at different points in time.