chapter 12: introduction to macroeconomics and gross domestic product
True or False: Underground economies are smallest in countries with strong economies.
TRUE
Calculate the GDP for a country that in one year sells 10,000 speedboats for $40,000 each and 5,000 race cars for $90,000 each, and nothing else. A speedboat engine contributes $9,000 to the total price, and a race car engine is worth $12,000.
(10,000×$40,000)+(5,000×$90,000)=$850 million
Zander buys $1,000 in U.S. Treasury bonds and spends $1,200 on new tires, which are produced domestically, for his car. How much is added to the U.S. GDP because of this?
1200
Which of the following statements are good assessments of the value of GDP as an economic statistic? Which are not?
ACCURATE STATEMENT Nominal GDP cannot indicate whether the economy is getting stronger or weaker. GDP is correlated with many measures of human welfare. INACCURATE STATEMENT GDP accurately captures all economic activity. GDP does not account for goods being imported rather than locally produced.
Shadow economies are estimated to produce millions of dollars in goods and services every year. However, due to the nature of these productions, they remain unaccounted for in GDP. Fill in the blanks to complete the following sentence about the shortcomings of GDP.
Activities such as selling ILLEGAL NARCOTICS, babysitting services paid in CASH to a 14-year-old, and cash tips unreported by a waitress are NOT EASILY measured and are NOT INCLUDED in GDP.
Fill in the blanks to complete the following sentence about the differences between real GDP and nominal GDP.
Although nominal GDP rises by an average of about 4% per year, real GDP RISES by only 2.4% per year when the annual INFLATION rate is 1.6%.
How do nonmarket goods cause inaccuracies in measuring the productivity of a nation?
An economy with many nonmarket goods may have its output underrated.
Fill in the blanks to complete the passage about how GDP is computed.
Bella's Bakery Shop produces many baked goods such as bread, muffins, and cupcakes. The flour, eggs, and sugar used for baking are INTERMEDIATE goods and are not directly counted in GDP, but they are accounted for in the price of the FINAL PRODUCED goods.
Which of the following products would count toward GDP, and which would not?
COUNTED IN GDP a new bicycle sold by a bike shop bicycle handlebars sold to consumers as a customization item NOT COUNTED IN GDP a used bicycle sold at a garage sale bicycle handlebars sold to a bike manufacturer
Match the component of GDP national income accounting to the correct expenditure. A label may be used more than once.
CONSUMPTION-Jennifer buys toothpaste.consumption INVESTMENT- A farmer buys a new tractor. NET EXPORTS- Almonds are grown to sell overseas. CONSUMPTION- David buys a new Ford truck. GOVERNMENT SPENDING- Lonnie the police officer cashes her paycheck at the end of the week. INVESTMENT- A family of three purchases a newly built home.
The real GDP of country A grew by only 1% from 2016 to 2018 while the real GDP of country B grew by 5% during that same time span. Based on the data, what can we say definitely about the two countries? What can we not say?
CORRECT Country B will eventually have a higher real GDP than country A if the economy of each country continues to grow this way. NOT NECESSARILY CORRECT The real GDP of country A grew by only 1% from 2016 to 2018 while the real GDP of country B grew by 5% during that same time span. Based on the data, what can we say definitely about the two countries? What can we not say?
The graph below shows real per capita GDP in six nations from 1950 to 2018. Which of the following countries experienced persistent growth from 1980 to 2018, and which did not?
COUNTRIES THAT EXPERIENCED PERSISTENT GROWTH Turkey Mexico India Poland COUNTRIES THAT DID NOT EXPERIENCE PERSISTENT GROWTH Nicaragua Liberia
According to the table, Canada has the tenth-highest GDP among the countries with the largest economies in the world. Does this mean Canada also has the tenth-best standard of living? Fill in the blanks to complete the passage.
Canada's GDP DOES NOT INDICATE that Canadians have the tenth-best standard of living. A nation's PER CAPITA GDP is a better standard-of-living indicator, because it measures AVERAGE INCOME. Using this measure, it looks like Canada has a better standard of living than all but one other nation.
The term "laissez faire" means "allow to do" in French. What school of thought follows this principle and what does it imply?
Classical economists claim laissez faire implies that the government does not need to use its power to help the economy.
What data do economists use to calculate the real GDP of a nation, and what data do they not use?
DATA ECONOMISTS USE price level market values NOT DATA ECONOMISTS USE income tax rate unemployment rate
Match each term with the phrase that best describes it.
DEMAND SIDE- market focus of the Keynesian school QUICKLY- pace with which the classical school believes markets adjust SHORT-RUN DEMAND STIMULATION-the result of printing new money according to the Keynesian school SLOWLY- pace with which the Keynesian school believes markets adjust INFLATION- the result of printing new money according to the classical school SUPPLY SIDE- market focus of the classical school
Fill in the blanks to complete the passage explaining why GDP is not always the best measure of a country's well-being.
GDP is the best measure of a nation's economic activity. However, GDP does not take into account many factors that affect quality of life, like the amount of people's LEISURE TIME or the cleanliness of the ENVIRONMENT. GDP only measures a country's economic OUTPUT.
Assuming all of the activities of the underground economy are measured and included in GDP, identify which statement would be true regarding their effect on GDP.
GDP will increase.
Which three countries would you expect to have the highest standard of living? Drag the labels to the appropriate country.
HGIGHEST -US SECOND HIGHEST- GERMANY THIRD HIGHEST- CANADA
The graph below depicts U.S. nominal and real GDP from 2012-2019. Inflation, or growth in the overall price level, explains the difference between nominal and real GDP. Click or tap on the area of the graph that represents inflation.
IN BETWEEN NOMINAL GDP AND REAL GDP
For each output, apply the appropriate label. A label may be used more than once.
INCLUDED IN GDP a computer sold to a retail consumer landscaping services paid for by a homeowner NOT INCLUDED IN GDP a smartphone manufactured overseas and sold locally a microprocessor chip sold to a computer manufacturer
What might a decrease in sales of new cars indicate about the state of the economy? What would it not necessarily indicate?
INDICATED BY A DECREASE IN NEW CAR SALES The economy is weak. GDP is going to decrease in the near future. NOT NECESSARILY INDICATED BY A DECREASE IN NEW CAR SALES The economy is strong. GDP rose in the recent past.
Identify each good as either intermediate or final. A label may be used more than once.
INTERMEDIATE lenses bought by a camera manufacturer tires used by a car manufacturer FINAL tires bought by a driver for her personal vehicle a memory card bought by a gamer
Which of the following are examples of investment, and which are not?
INVESTMENT A photojournalist buys a new camera. A mechanic buys a new wrench. A professional painter buys new brushes. NOT INVESTMENT Your neighbor buys a new television. Your friend buys a new set of golf clubs.
How do intermediate goods factor into the calculation of GDP?
Intermediate goods do not factor into GDP; only final goods are counted.
Fill in the blanks to complete the passage about GDP and economic health.
Low GDP is not necessarily an indicator of an economy in poor health. For one thing, a SMALL country may have a low GDP but a high PER CAPITA GDP. For another thing, an economy with a low GDP but a strong REAL GDP GROWTH RATE is healthier than an economy with a comparable GDP that is stagnant or declining.
Match the use of GDP data to the appropriate situation.
MEASURING LONG-TERM ECONOMIC GROWTH- Leia examines real per capita GDP over a ten-year period to determine whether the economy of a particular country is in decline or on the rise. MEASURING BUSINESS CYCLES- Brad looks at real per capita GDP to determine what impact the recent recession has had on economic activity. MEASURING LIVING STANDARDS- Lupe examines the real per capita GDP of seven nations to determine which country might have the wealthiest citizens.
Classify each concept as microeconomic or macroeconomic.
MICROECONOMIC the financial decisions of a family the hiring decisions of a company MACROECONOMIC the unemployment rate of a nation the median income of a small state
Which questions explore microeconomic topics and which explore macroeconomic topics? Apply the correct label to each question.
MICROECONOMICS Why did company C increase its advertising budget? Why did Billi buy a new house? MACROECONOMICS What effect did falling home values have on unemployment? What effect did the interest rate have on inflation?
Which of the following are examples of nonmarket services, and which are not?
NONMARKET SERVICE cutting your own hair changing the oil in your car yourself NOT A NONMARKET SERVICE going to the barber taking your car to the mechanic for routine maintenance
Do recessions always prevent a long-term increase in a nation's real GDP?
No; a nation will normally also have periods of economic expansion that balance out recessions.
In the graph, click or tap on the start and end points of a period of recession or contraction.
POINTS NOT INTERSECTING THE STRAIGHT LINE
Click or tap on the names of countries where the standard of living improved substantially between 1950 and 2000.
POLAND TURKEY MEXICO INDIA
The graph below shows real per capita GDP in six nations from 1950 to 2018. Place the following countries in order of consumer expenditure, starting with the country that most likely has the highest consumer expenditure.
Poland Turkey Mexico India Nicaragua Liberia
Which of the following are true according to the Keynesian economic view, and which are false?
TRUE ACCORDING TO KEYNESIANS Increasing the availability of money stimulates demand. NOT TRUE ACCORDING TO KEYNESIANS Markets effectively distribute goods and services and will rapidly restore themselves to order following economic contraction. The government should take a laissez faire approach to the economy. An increase in government spending will not affect economic growth.
Which of the following statements are true about the underground economy, and which are false?
TRUE STATEMENT It is possible for the underground economy to have an effect on the legitimate economy. It is not possible to accurately measure the size of the underground economy. FALSE STATEMENT All of the goods and services traded in the underground economy are illegal. All underground economic activity is harmful to society.
Complete the following passage regarding the Great Depression.
The Great Depression challenged the CLASSICAL economic belief that the macroeconomy QUICKLY returns to long-run equilibrium following an economic slowdown. It wasn't until SEVERAL YEARS after the Depression began that the economy returned to pre-Depression levels.
The per capita GDP and GDP growth rates of country A and country B are the same. Nonetheless, the citizens of country B are clearly better off. How could this be true? Fill in the blanks to complete the passage.
The most natural interpretation of "better off" is that citizens of country B have a higher QUALITY OF LIFE. It is possible that the citizens of country B spend more time IN LEISURE ACTIVITIES. It is also possible that they live in a CLEANER ENVIROMENT environment. GDP DOES NOT measure the quality-of-life indicators that would explain this.
Classify each situation that GDP cannot measure.
UNDERGROUND ECONOMY A restaurant server takes home $75 in unreported tips each night. LEISURE TIME Country A has a very high GDP, but the average person works 60 hours a week. QUALITY OF ENVIRONMENT Unregulated industries pollute the air. NONMARKET GOOD You repair your own pants when your rip them.
Click or tap on the year that produced a 4% rate of real GDP growth.
YEAR 2014 NOMINAL GDP GROWTH RATE 8% PRICE LEVEL GROWTH RATE 4%
Suppose you and a friend are discussing a recent economic downturn. You ask your friend what she thinks the government ought to do. She replies, "Businesses need people to buy goods and services. If people don't have incomes, they cannot buy things and those businesses will have to shut down. The recession has caused unemployment to climb and incomes to fall, so the government needs to start spending. That's how we can get the economy growing again."True or False: Your friend's viewpoint is consistent with classical economics.
false
True or False: A service-based economy is less likely to be a source of prosperity than a goods-based economy.
false
True or False: You can figure out how much the economy has grown over the years by simply looking at nominal GDP.
false
Which of the following by definition directly adds to a country's GDP (gross domestic product)?
increased commercial travel
For purposes of computing GDP, how are net exports calculated?
net exports = exports - imports
Place the following dates and events in chronological order.
the era in which the classical view dominated economic thought beginning of the Great Depression John Maynard Keynes's General Theory published F.A. Hayek's Road to Serfdom published beginning of the Great Recession
