Chapter 2 Measurement

The three approaches to measuring GDP are called the

product approach, the income approach, and the expenditure approach.

In recent U.S. history

there has been little practical difference between GNP and GDP.

Discouraged workers are

those who have given up looking for work, even though they would like to be employed.

Government expenditures includes all of the following except

transfers.

Recently, consumption has comprised approximately

two-thirds of GDP.

Who among the following is considered to be in the labor force?

unemployed workers

In the United States, real GDP is currently calculated using

a chain-weighting scheme.

The income-expenditure identity is best paraphrased as

all spending generates income.

When we try to measure real GDP and the price level, if we underestimate the growth in real GDP, we will

always overestimate the rate of inflation.

Real GDP values current production at

base year prices.

GDP and GNP may differ

because some income generated by domestic production may be received as income by foreign residents.

In the period 1950-2000, the inflation rate in the U.S. CPI has

been more variable than the inflation rate in the GDP price deflator.

All of the following present significant problems with measuring real GDP and the price level except

changes in absolute price levels.

Suppose that the BMW plant in Spartanburg, SC, produces $10 million worth of vehicles in a given year. Of this total amount, $1 million in profits are returned to the owners of the company in Germany. The $1 million in profits

contributes to U.S. GDP, but not U.S. GNP.

Approaches to measuring GDP include all of the following except the

cost approach.

Additions to inventory are

counted as a component of investment spending.

To compute a monthly consumer price index, we need

data about item prices every month.

The GDP deflator is a broader measure of the price level than the CPI because

it covers investment.

The base year matters for the computation of real GDP because

it determines the relative weights of goods in GDP.

The product approach to measuring GDP values government production at

its cost of production.

The unemployment rate equals

number unemployed/Labor force

Suppose that the government collects $3 million in taxes, pays $2 million in social security benefits, pays $0.5 million in interest on the national debt, and pays workers $1 million to sit at their desks and work as little as possible. The government's contribution to GDP is

$1 million.

Suppose that in a given country in a given year, GNP equals $2,000, investment expenditures equal $200, government expenditures equal $150, and the current account surplus equals $50. Consumption expenditures therefore equal

$1,600.

Jim's Nursery produces and sells $1100 worth of flowers. Jim uses no intermediate inputs. He pays his workers $700 in wages, pays $100 in taxes and pays $200 in interest on a loan. Jim's profit is

$100.

Jim's Nursery produces and sells $1100 worth of flowers. Jim uses no intermediate inputs. He pays his workers $700 in wages, pays $100 in taxes and pays $200 in interest on a loan. Jim's contribution to GDP is

$1100.

Gelato ice cream maker shows the following on its balance sheet: revenue $200M, wages $100M, milk expenses $50M, strawberry purchases $5M, and taxes $25M. What is Gelato's contribution to GDP using the income approach?

$125M

Acme Steel Co. produces 1000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal, which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's contribution to GDP is

$15,000.

You are a baker. You paid $150K in wages, $50K for dough, $20K for power, $5K in interest for a business loan, $25K in taxes, and made a profit of $10K. How much did you contribution to GDP using the product approach?

$190K

Pamela's bakery produces 500 loaves of bread in a given year. Pamela pays $100 for flour and yeast, pays $600 in wages, pays $50 in interest on an existing loan, and pays $100 in taxes to the government. One of Pamela's bread slicing machines, which cost $75 each, wears out over the course of the year and must be scrapped. Pamela's profit for the year equals $75. Pamela's bread, therefore, sells for

$2.00 per loaf.

Here is what we know about a household: wages $25,000, unemployment insurance benefits $3,000, dividend income $4,000, income tax $5,000. What is the contribution to GDP of this household following the expenditure approach?

$28,000

Acme Steel Co. produces 1000 tons of steel. Steel sells for $30 per ton. Acme pays wages of $10,000. Acme buys $15,000 worth of coal, which is needed to produce the steel. Acme pays $2,000 in taxes. Acme's profit is

$3,000.

Suppose we have the following information about a car manufacturer: car sales $1000M, steal purchases $600M, wages $300M, interest on business loans $50M, and profits $50M. What is its contribution to GDP using the product approach?

$400M

We know the following about a tie manufacturer: tie sales $1,300, cotton purchases $750, wages $400, interest on business loans $100, and profits $50. What is the contribution to GDP of this producer using the income approach?

$550

We learn the following about a ski resort: ticket sales $100M, snow making expenses $70M, wages $20M, interest on business loans $5M, and profits $5M. What is the contribution to GDP using the product approach?

$70M

Suppose that g1 represents the ratio of year 2 GDP to year 1 GDP, both valued at year 1 prices. Suppose that g2 represents the ratio of year 2 GDP to year 1 GDP, both valued at year 2 prices. The ratio of chain-weighted year 2 GDP to chain-weighted year 1 GDP equals

(g1xg2)^1/2

Assume that in an economy with 200M inhabitants, 90M work, 4M are looking for a job, 3M receive unemployment insurance compensation, and 6M receive unemployment insurance compensation and are looking for a job. What is the unemployment rate?

10%

In Dakistan, 3M people work, 0.5M are unemployed and get UI benefits, 0.1M are unemployed without UI benefits and 3M have no intention to work. The unemployment rate is (to the nearest %)

17%.

Suppose that GDP is equal to 1000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Private savings must equal

250

Suppose that GDP is equal to 1000, national saving is equal to 200, the current account deficit is equal to 100, and the government budget deficit is equal to 50. Investment must equal

300

Assume that in an economy with 200M inhabitants, 90M work, 4M are looking for a job, 3M receive unemployment insurance compensation, and 6M receive unemployment insurance compensation and are looking for a job. What is the participation rate?

50%

The income components of GDP include all of the following except

foreign income.

Construction of chain-weighted real GDP employs the technique of a

Fisher index.

A furniture maker used to buy its wood, but has now bought the lumber company. How does this impact GDP?

It does not change.

The participation rate equals

Labor Force/total working age population

The principal printed source for reporting the U.S. National Income and Product Accounts is called the

Survey of Current Business

Private disposable income is equal to

Y + NFP +TR + INT - T.

Problems with interpreting the unemployment rate as a measure of labor market tightness include

discouraged workers and variations in how intensively the unemployed search for work.

A price index can be computed by

dividing a nominal variable by its real counterpart.

The components of investment expenditures include all of the following except

financial investment.

The components of consumption expenditures include all of the following except

government consumption.

When there is rapid inflation,

growth in nominal GDP exceeds growth in real GDP.

If real GDP grows faster than nominal GDP, it is a sign that

inflation is negative.

Value added is equal to the value of a firm's production minus

intermediate goods used in production.

Inventory investment consists of

inventories of finished goods, goods in process, and raw materials.

Additions to the nation's capital stock are brought about through

investment

Investment spending is

much more volatile than consumption spending.

In recent years, which of the following has comprised less than 5% of GDP?

net exports

The expenditure components of GDP include all of the following except

net factor payments.

GDP may inaccurately measure the value of aggregate output because it may not properly account for

production in the underground economy and the true value of government production.

An example of a flow would be the

rate at which water goes down the drain.

An example of a stock would be

the amount of money in circulation.

To calculate value added, we need to subtract

the cost of domestic- and foreign-produced intermediate inputs.

The primary recommendation coming from a study by Jones and Riddell suggests dividing the population into four distinct groups (instead of the current three). These groups are

the employed, the unemployed, the discouraged workers, and those not in the work force.

The expenditure components of GDP include all of the following except

the sum of government spending on goods and services, transfer payments, and interest on the national debt.

Even when measured accurately, GDP may be a misleading measure of economic welfare because it cannot account for

the value of non-market production and the consequences of an unequal distribution of income.

The value of a producer's output minus the value of all intermediate goods used in the production of that output is called the producer's

value added.

To study a macroeconomy, we need to use real data because

we want to get rid of the illusion of price effects.

If a particular measure of real GDP consistently underestimates growth in real GDP, then the rate of inflation as measured by the GDP deflator

will consistently be overestimated.