Chapter 27 Quiz

Paul Mahoney of the University of Virginia compared economic growth rates of nations with common law and civil law systems from 1960 to the 1990s. Summarize the results of this comparison.

Mahoney finds that economic growth has been one-third higher in the common law nations than it has been in civil law nations.

List the four key elements of the definition of Gross Domestic Product (GDP).

Market value, new, domestically produced, and final goods and services.

A GDP that has been deflated or inflated to reflect changes in the price level is called real GDP

True

Final goods are consumption goods, capital goods, and services that are purchased by their end users rather than being ones used for further processing or manufacturing

True

If nominal GDP for an economy is $11,000 billion and the price index is 110, then real GDP is $10,000 billion

True

In computing gross domestic product, private transfer payments are excluded because they do not represent payments for currently produced goods and services

True

In national income accounting, any increase in the inventories of business firms is included in gross private domestic investment

True

National income accounting allows us to assess the performance of the economy and make policies to improve that performance

True

Net foreign factor income is the difference between the earnings of foreign-owned resources in the United States and the earnings from U.S. supplied resources abroad

True

The income approach to GDP includes compensation of employees, rents, interest income, proprietors' income, corporate profit, and taxes on production and imports

True

The net exports of an economy equal its exports of goods and services less its imports of goods and services

True

The sale of stocks and bonds is excluded from GDP

True

The total value added to a product and the value of the final product are equal

True

To adjust nominal GDP for a given year to obtain real GDP, it is necessary to multiply nominal GDP by the price index (expressed in hundredths) for that year

False

A refrigerator was produced by its manufacturer in year 1, sold to a retailer in year 1, and sold by the retailer to a final consumer in year 2. The refrigerator was (a) counted as consumption in year 1 (b) counted as savings in year 1 (c) counted as investment in year 1 (d) not included in the gross domestic product of year 1

(c) counted as investment in year 1

If gross private domestic investment is greater than depreciation, the economy will most likely be (a) static (b) declining (c) expanding (d) inflationary

(c) expanding

Nominal GDP was $3,774 billion in year 1 and the GDP deflator was 108 and nominal GDP was $3,989 in year 2 and the GDP deflator that year was 112. What was real GDP in years 1 and 2, respectively? (a) $3,494 billion and $3,562 billion (b) $3,339 billion and $3,695 billion (c) $3,595 billion and $3,725 billion (d) $3,643 billion and $3,854 billion

(a) $3,494 billion and $3,562 billion

Which is a primary use for national income accounting? (a) it provides a basis for assessing the performance of the economy (b) it measures economic efficiency in specific industries (c) it estimates expenditures on nonproduction transactions (d) it analyzes the cost of pollution to the economy

(a) it provides a basis for assessing the performance of the economy

Which of the following is a public transfer payment? (a) the Social Security benefits sent to a retired worker (b) the sale of shares of stock in Microsoft Corporation (c) the sale of a used (secondhand) toy house at a garage sale (d) the birthday gift of a check for $50 sent by a grandmother to her grandchild

(a) the Social Security benefits sent to a retired worker

The service of a babysitter performs when she stays at home with her baby brother while her parents are out and for which she receives no payment is not included in the gross domestic product because (a) this is a nonmarket transaction (b) this is a nonproduction transaction (c) this is a noninvestment transaction (d) multiple counting would be involved

(a) this is a nonmarket transaction

Suppose nominal GDP rose from $500 billion to $600 billion while the GDP price index increased from 125 to 150. Real GDP (a) was constant (b) increased (c) decreased (d) cannot be calculated from these figures

(a) was constant

Nominal GDP is less than real GDP in an economy in year 1. In year 2, nominal GDP is equal to real GDP . In year 3, nominal GDP is slightly greater than real GDP. In year 4, nominal GDP is significantly greater than real GDP . Which year is most likely to be the base year that is being used to calculate the price index for this economy? (a) 1 (b) 2 (c) 3 (d) 4

(b) 2

The allowance for the private and publicly owned capital that has been used up or consumed in producing the year's GDP is (a) net domestic product (b) consumption of fixed capital (c) undistributed corporate profits (d) taxes on production and imports

(b) consumption of fixed capital

The annual charge that estimates the amount of private capital equipment used up in each year's production is called (a) investment (b) depreciation (c) value added (d) multiple counting

(b) depreciation

GDP accounting includes (a) the goods and services produced in the underground economy (b) expenditures for equipment to reduce the pollution of the environment (c) the value of the leisure enjoyed by citizens (d) the goods and services produced but not bought and sold in the markets of the economy

(b) expenditures for equipment to reduce the pollution of the environment

The sale in year 2 of an automobile produced in year 1 would not be included in the gross domestic product for year 2; doing so would involve (a) including a nonmarket transaction (b) including a nonproduction transaction (c) including a noninvestment transaction (d) public transfer payment

(b) including a nonproduction transaction

Which is a major reason why GDP is not an accurate index of society's economic well-being? (a) it includes changes in the value of leisure (b) it excludes many improvements in product quality (c) it includes transactions from the underground economy (d) it excludes transactions from the buying and selling of stocks

(b) it excludes many improvements in product quality

What can happen to the allocation of corporate profits? (a) it is paid to proprietors as income (b) it is paid to stockholders as dividends (c) it is paid to the government as interest income (d) it is retained by the corporation as rents

(b) it is paid to stockholders as dividends

According to national income accounting, money income derived from the production of this year's output is equal to (a) corporate profits and the consumption of fixed capital (b) the amount spent to purchase this year's total output (c) the sum of interest income and the compensation of employees (d) gross private domestic investment less the consumption of fixed capital

(b) the amount spent to purchase this year's total output

Which would be considered an investment according to economics? (a) the purchase of newly issued shares of stock in Microsoft (b) the construction of a new computer chip factory by Intel (c) the resale of stock originally issued by the General Electric corporation (d) the sale of a retail department store building by Sears to JCPenney

(b) the construction of a new computer chip factory by Intel

Gross Domestic Product (GDP) is defined as (a) personal consumption expenditures and gross private domestic investment (b) the sum of wage and salary compensation of employees, corporate profits, and interest income (c) the market value of final goods and services produced within a country in 1 year (d) the market value of all final and intermediate goods and services produced by the economy in 1 year

(c) the market value of final goods and services produced within a country in 1 year

GDP in an economy is $3,452 billion. Consumer expenditures are $2,343 billion, government purchases are $865 billion, and gross investment is $379 billion. Net exports are (a) +$93 billion (b) +$123 billion (c) -$45 billion (d) -$135 billion

(d) -$135 billion

In an economy, the total expenditure for a market basket of goods in year 1 (the base year) was $4,000 billion. In year 2, the total expenditure for the same market basket of goods was $4,500 billion. What was the GDP price index for the economy in year 2? (a) 0.88 (b) 1.13 (c) 188 (d) 113

(d) 113

A price index one year was 145, and the next year it was 167. What is approximate percentage change in the price level from one year to the next as measured by that index? (a) 12% (b) 13% (c) 14% (d) 15%

(d) 15%

GDP provides an indication of society's valuation of the relative worth of goods and services because it (a) provides an estimate of the value of secondhand sales (b) gives increased weight to security transactions (c) is an estimate of income received (d) is a monetary measure

(d) is a monetary measure

To include the value of the parts used in producing the automobiles turned out during a year in gross domestic product for that year would be an example of (a) including a nonmarket transaction (b) including a nonproduction transaction (c) including a noninvestment transaction (d) multiple counting

(d) multiple counting

If both nominal gross domestic product and the level of prices are rising, it is evident that (a) real GDP is constant (b) real GDP is declining (c) real GDP is rising but not so rapidly (d) no conclusion can be drawn concerning the real GDP of the economy on the basis of this information

(d) no conclusion can be drawn concerning the real GDP of the economy on the basis of this information

Provide an example of a "regrettable necessity."

Diplomacy, national security, police and fire protection, and prison facilities.

Explain the impact of disease on the formation of political and legal institutions.

Disease provided little incentive to promote democratic institutions or stable long-term property rights.

GDP includes the sale of intermediate goods and excludes the sale of final goods

False

GDP is a count of the physical quantity of output and is not a monetary measure

False

GDP is a precise measure of the economic well-being of society

False

Government purchases include spending by all units of government on the finished products of business but exclude all direct purchases of resources such as labor

False

Gross domestic product measures at their market values the total output of all goods and services produced in the economy during a year

False

If gross private domestic investment is greater than depreciation during a given year, the economy's production capacity has declined during that year

False

Personal consumption expenditures include only expenditures for durable and nondurable goods

False

Social security payments and other public transfer payments are counted as part of GDP

False

Taxes on production and imports are the difference between gross private domestic investment and net private domestic investment

False

The expenditure made by a household to have a new home built is a personal consumption expenditure

False

The external costs from pollution and other activities associated with the production of the GDP are deducted from total output

False

The productive services of a homemaker are included in GDP

False

Some important parts of GDP are "imputed". What does it mean to be imputed? Provide an example of a GDP calculation that is imputed.

Imputed or estimated by the officials at the government agency that publishes the GDP numbers. For example, even though there is no "market" in owner-occupied housing, the Commerce Department has devised methods of estimating the implicit rental value of houses occupied by their owners, and it includes the aggregate value these services in the published measure of real GDP.

Distinguish between "inclusive" and "extractive" legal institutions.

Inclusive institutions tend to be democracies based on the common law and they have legal systems that create incentives for everyone to invest in the future. Extractive institutions are often based on civil law and have centralized government powers, but the key is that their institutions protect the political and economic power of a small elite that takes resources from everyone else.

Recent studies have found three fundamental political and legal institutions that are conductive to economic growth. List three institutions.

Rule of law, physical & human capital, capital stock

"But natural resources can be only a very small part of the answer, as witnessed by many counterexamples." Provide and briefly explain four countries that serve as "counterexamples".

Switzerland and Luxembourg lack key resources yet the real income of those lands has grown rapidly and propels them into prosperity. Hong Kong, which has few key resources, is one of the economic miracles of modern times while in Russia, a land with high quantities of every important resource, most people remain stuck in economic misery.

Distinguish between the English common law system and the French civil law system.

The English common law system favors a limited role for government and emphasizes the importance of the judiciary in constraining the power of the executive and legislative branches. While the civil law favors a strong centralized government in which the legislature and executive branch have the power to grant superior treatment to special interests.

What is the "biggest category of do-it-yourself services left out of the GDP statistics"?

The biggest category of do-it-yourself services left out of the GDP statistics consists of those performed in the house by homemakers.