Chapter 8 Homework

government purchases

1 of 4 categories of expenditure Spending by​ federal, state, and local governments on goods and services.

interest

Net interest received by​ households, or the difference between interest earned on savings​ accounts, government bonds and other​ investments, and interest paid on car​ loans, mortgages, and other debts.

rent

Received by households.

household production

Refers to goods and services that people produce for themselves. The most important type of household production is the services a homemaker provides to the​ homemaker's family. Examples include cleaning​ house, preparing​ meals, and caring for children. The value of these services is not included in GDP.

underground economy

Refers to the buying and selling of goods and services that is concealed from government to avoid taxes or regulations or because the goods and services are illegal. Examples include drugs and prostitution. According to some​ estimates, the U.S. underground economy may be as much as​ 10% of measured GDP.

value added

The additional market value a firm adds to a product. is equal to the difference between the price for which a firm sells a good and the price it paid other firms for the intermediate goods. The total value added will always equal the sale price of the final good. Put​ differently, the sale price of a good equals the sum of the value added at each step in the production process.

real GDP (RGDP)

The value of final goods and services evaluated at base year prices.

Nominal GDP (NGDP)

The value of final goods and services evaluated at​ current-year prices.

intermediate good or service

goods used in the production of other goods and services. For​ example, General Motors does not produce tires for its cars and​ trucks; it buys them from tire​ companies, such as Goodyear and Michelin.

price level

A measure of the average price of goods and services in the economy.

GDP deflator

A measure of the price​ level, calculated by dividing nominal GDP by real GDP and multiplying by​ 100: GDP deflator = (NGDP/RGDP)×100.

National income is A. GDP minus depreciation. B. GNP plus depreciation. C. NNP minus income taxes. D. GDP minus sales taxes.

A. GDP minus depreciation. Gross domestic product​ (GDP) minus depreciation is equal to national income.

Which of the following would be included in the gross national product​ (GNP) of the United​ States? A. Production from a U.S. firm that operates in Mexico. B. Production from an Hungarian citizen who works in​ Denver, CO. C. Production from a Canadian firm that operates in Montana. D. All of the above are included in the GNP of the U.S.

A. Production from a U.S. firm that operates in Mexico. Gross national product​ (GNP) is the value of final goods and services produced by residents of the United​ States, even if that production occurs outside the United States.​ Ford, for​ example, has assembly plants in the United​ Kingdom, and Toyota has assembly plants in the U.S. GNP includes foreign production by U.S. firms but exclude U.S. production by foreign firms.

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the​ present, what would be true of the relationship between nominal GDP and real GDP? A. RGDP​ < NGDP because prices are rising. B. RGDP​ > NGDP because prices are falling. C. RGDP​ = NGDP because prices are stable. D. The relationship is uncertain without more information on prices.

A. RGDP​ < NGDP because prices are rising. Real GDP holds prices constant.​ Because, on​ average, prices rise from year to​ year, real GDP is greater than nominal GDP in years before the base year and less than nominal GDP in years after the base year.

The largest component of gross domestic income is A. rent. B. wages. C. profits. D. interest.

B. wages

The figure shows the values of the components of GDP for the year 2018. Based on the data​ shown, which of the following statements regarding the components of GDP is​ false? A. Net exports are​ negative, which reduces GDP. B. Imports are greater than exports. C. Consumer spending on services is less than the sum of spending on durable and nondurable goods. D. Consumption accounts for 68.1 percent of​ GDP, far more than any of the other components.

C. Consumer spending on services is less than the sum of spending on durable and nondurable goods. The graph shows that consumption in 2018 is $13,948 billion. The table demonstrates that consumer spending on services ​($9,610 billion) is greater than the sum of spending on durable and nondurable goods ​($1,459 billion​ + $2,879 billion).

Disposable personal income is A. national income minus depreciation. B. national income minus personal taxes. C. personal income minus personal taxes. D. personal income minus indirect business taxes.

C. personal income minus personal taxes. Disposable personal income is the best measure of the income households have available to spend. It is equal to personal income minus personal tax payments such as federal income tax.

real GDP per capita

Calculated by dividing the value of real GDP for a country by the​ country's population.

wages

Compensation received by employees including health benefits.

final good or service

one that is purchased by its final user and is not included in the production of any other good or service. Examples of final goods are a hamburger purchased by a consumer and a computer purchased by a business.

profits

Profits received by sole​ proprietorships, small​ business, and large corporations.

In​ 2011, the value of the GDP deflator is _______. ​(Enter your response rounded to the nearest whole​ number.) In​ 2012, the value of the GDP deflator is _______. ​(Enter your response rounded to the nearest whole​ number.)

115; 119 A measure of the price​ level, calculated by dividing nominal GDP by real GDP and multiplying by​ 100: GDP deflator = (NGDP/RGDP)×100. A measure of the average price of goods and services in the economy.

Net exports

1 of 4 categories of expenditure Exports minus Imports.

gross private domestic investment

1 of 4 categories of expenditure Spending by firms on new​ factories, machinery, and additions to​ inventory; spending by households on new houses.

personal consumption

1 of 4 categories of expenditure Spending by households on goods and services​ (not including new​ houses).

Why isn't GDP a perfect measure of a country's well-being?

1. The value of leisure is not included in GDP. When a person​ retires, GDP falls even though that​ person's well-being may have increased. 2. GDP is not adjusted for pollution or other negative effects of production. For​ example, the value of cigarettes is included in​ GDP, with no adjustment made for the costs of the health effects many smokers develop. 3. GDP is not adjusted for crime or other social problems. An increase in crime might lower​ well-being but can increase GDP if it leads to increased spending on public safety. 4. GDP does not account for income distribution. That​ is, GDP measures the size of the​ pie, not how the pie is divided up.

Real GDP in 2017 equals $______

6680 get this by adding (100 x 40) + (80 x 11) + (20 x 90) Nominal GDP​ (NGDP) The value of final goods and services evaluated at​ current-year prices. For​ example, NGDP for 2017 is calculated using both quantities and prices from 2017. Real GDP​ (RGDP) The value of final goods and services evaluated at​ base-year prices. For​ example, if the base year is the year​ 2009, then RGDP for 2017 would be calculated using quantities from 2017 and prices from 2009. The value shows the change in the productive capacity of the economy independent of changes in the price level​ (inflation-adjusted).

What are the four categories of​ income? A. ​Wages, Interest,​ Rent, and Profit. B. ​Labor, Capital, Natural​ Resources, and Entrepreneurship. C. ​Wages, Salaries,​ Interest, and Dividends. D. ​Consumption, Investment, Government​ Purchases, and Net Exports.

A. ​Wages, Interest,​ Rent, and Profit. We divide income into four​ categories: wages,​ interest, rent, and profit. Firms pay wages to households in exchange for labor​ services, interest for the use of​ capital, and rent for natural resources such as land. Profit is the income that remains after the firm has paid​ wages, interest, and rent. Since every penny spent on goods and services falls into one of these four​ categories, the value of total production in an economy is equal to the value of total income​ (excluding taxes).

The following table illustrates the value added approach to calculating GDP. Please complete the table.

An alternative way of calculating GDP is the ​value-added method. Value added refers to the additional market value a firm gives to a product and is equal to the difference between the price for which a firm sells a good and the price it paid other firms for the intermediate goods. The total value added will always equal the sale price of the final good. Put​ differently, the sale price of a good equals the sum of the value added at each step in the production process.

Based on the table and​ graph, which of the following statements regarding total production and total income is​ true? A. Disposable personal income and national income are equal in 2018. B. Each measure of production and income gives a different value​ (even if only​ slightly) for total production and income. C. GDP and GNP are equal in 2018. D. Disposable personal income and personal income are equal in 2018.

B. Each measure of production and income gives a different value​ (even if only​ slightly) for total production and income. The Bureau of Economic Analysis computes five measures of production and income. The most important measure of total production and total income is gross domestic product​ (GDP). As we will see in later​ chapters, for some​ purposes, the other measures of total production and total income shown in the figure turn out to be more useful than GDP.

Why is GDP an imperfect measurement of total production in the​ economy? A. The official measure of GDP does not include intermediate goods and services. B. GDP does not include household production or production from the underground economy. C. GDP measures total income paid to the factors of​ production, not production. D. The BEA does not include the value of new houses in GDP.

B. GDP does not include household production or production from the underground economy.

Which of the following equations sums up the components of Gross Domestic Product​ (GDP)? A. Y=C−I−G−NX B. Y = C+I+G+NX C. Y=C+I+G−NX D.

B. Y = C+I+G+NX Y = C+I+G+NX tells us that GDP​(denoted Y) equals consumption​(C) plus investment​(I) plus governments purchases​(G) plus net exports​(NX).

If prices rise over​ time, then real GDP will be A. larger than nominal GDP in years after the base year. B. larger than nominal GDP in years before the base year. C. smaller than nominal GDP in years before the base year. D. smaller than nominal GDP in the base year.

B. larger than nominal GDP in years before the base year.

Personal income is A. equal to the value of all final goods and services produced within a​ country's borders during one year. B. national income minus retained corporate earnings plus government transfer payments and interest on government bonds. C. national income plus government transfer payments. D. national income minus income taxes.

B. national income minus retained corporate earnings plus government transfer payments and interest on government bonds. Personal income Income received by households. This is equal to national income minus corporate earnings plus government transfer payments and interest on government bonds. pg. 265

What are the four major categories of​ expenditure? A. Final​ goods, intermediate​ goods, production, and income. B. ​Consumption, investment, government​ purchases, and net exports. C. ​Wages, interest,​ rent, and profit. D. ​Labor, capital, natural​ resources, and entrepreneurship.

B. ​Consumption, investment, government​ purchases, and net exports. The Bureau of Economic Analysis​ (BEA) divides its statistics on Gross Domestic Product​ (GDP) into four major categories of​ expenditures: 1. Personal​ Consumption: Spending by households on goods and services​ (not including new​ houses). 2. Gross Private Domestic​ Investment: Spending by firms on new​ factories, machinery, and additions to​ inventory; spending by households on new houses. 3. Government​ Purchases: Spending by​ federal, state, and local governments on goods and services. 4. Net​ Exports: Exports minus Imports.

Real GDP per capita is often used as a measure of general​ well-being. While increases in real GDP often do lead to increases in the​ well-being of the​ population, why is real GDP not a perfect measure of​ well-being? A. GDP does not include crime rates or income distribution. B. The costs of pollution are not included. C. The value of leisure is not included. D. All of the above.

D. All of the above. GDP is not a perfect measure of a​ country's well-being for the following​ reasons: 1. The value of leisure is not included in GDP. When a person​ retires, GDP falls even though that​ person's well-being may have increased. 2. GDP is not adjusted for pollution or other negative effects of production. For​ example, the value of cigarettes is included in​ GDP, with no adjustment made for the costs of the health effects many smokers develop. 3. GDP is not adjusted for crime or other social problems. An increase in crime might lower​ well-being but can increase GDP if it leads to increased spending on public safety. 4. GDP does not account for income distribution. That​ is, GDP measures the size of the​ pie, not how the pie is divided up.

National Income is A. real GDP minus personal taxes. B. nominal GDP minus GNP. C. nominal GDP minus personal taxes. D. GDP minus depreciation.

D. GDP minus depreciation.

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. A. Profits include the profits of sole proprietorships and profits of corporations. B. Wages are slightly more than three times as large as the profits received by sole proprietors and the profits received by corporations combined. C. The largest component of income received by households is wages. D. Gross domestic income is measured precisely.

D. Gross domestic income is measured precisely. Gross domestic income includes indirect business​ taxes, depreciation, other smaller​ items, and an allowance for measurement problems called the​ "statistical discrepancy."

gross domestic Income

GDP calculated as the sum of income payments to households. This​ includes: ​Wages: Compensation received by employees including health benefits. ​Interest: Net interest received by​ households, or the difference between interest earned on savings​ accounts, government bonds and other​ investments, and interest paid on car​ loans, mortgages, and other debts. ​Rent: Received by households. ​Profit: Profits received by sole​ proprietorships, small​ business, and large corporations.

national income

In producing goods and​ services, some​ machinery, equipment, and buildings wear out and have to be replaced. The value of this​ worn-out machinery is called depreciation. National income is GDP minus depreciation. In the National Income and Product Accounts​ (NIPA), depreciation is referred to as the consumption of fixed capital. pg 265

Indicate whether each of the following is a final​ good, an intermediate​ good, or neither. Coffee beans purchased by a coffee shop ▼ Final good Intermediate good Neither One share of Google stock ▼ Final good Intermediate good Neither A new​ pick-up truck purchased by a consumer ▼ Intermediate good Final good Neither A new home purchased by a family

intermediate good; neither; final good; final good