ECN 101 Chapther 5-6
GDP growth looks at how the value of GDP changes over time.
% change (growth) = new (or most current value) - old (previous value)/DEVIDE OVER OLD(PREVIOUS VALUE) old (previous value) x 100 So to compute the growth rate of GDP from, say, 2011 to 2012, we calculate: growth rate of GDP = GDP2012 - GDP2011 divide GDP2001 X 100 For example, U.S. GDP in 2011 was estimated at $15.08 trillion, while in 2012 it was estimated at $15.68 trillion. Fitting these into the equation, we have growth rate of GDP = 15.68 -15.08 : 15.08 X 100= .04 3 100 =4.0 indicating that GDP grew 4.0 percent between 2011 and 2012
4. The Informal (underground) economy is not included in GDP
. The underground, or shadow economy includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Recent studies estimate the U.S. shadow economy to be approximately 10% of GDP, at least a trillion dollars. http://www.usatoday.com/story/money/business/2013/05/12/2-trillion-dollar-underground-economy-recovery-savior/2144279/ Crash Course Economics #32
. GDP doesn't account for the environment
. There have been attempts to incorporate the environment by using satellite accounts and the EDP. There are difficulties in calculating the value of the environment discussed in your text as using the damage cost vs. maintenance cost method. A subset of this critique concerns, the focus on GDP and growth. If societies continue to focus on GDP absent the environment does this promote irresponsible growth? Can we continue to grow with finite resources? Should we consider degrowth? http://www.youtube.com/watch?v=iOB3TQYJzX0&list=PL3494549B6C4B59CB http://www.youtube.com/watch?v=GHnXXeBVkPo&list=PL3494549B6C4B59CB&index=8
Two things to think about regarding inflation:
1. What are costs and benefits? Inflation decreases the purchasing power of money (your real income) - meaning it takes more to purchase the same goods and services as previously needed. But, inflation can have different impacts on groups in society. For example, if you are on a fixed income (like a pension), inflation erodes the value of your money, meaning you have less purchasing power. However, if you are a debtor (someone who owes money), inflation can be viewed as "beneficial" in that the money you are paying back has less purchasing power then when it was borrowed.
3. Suppose that in 2004 the total output in a single-good economy was 7,000 buckets of chicken. Also, suppose that in 2004 each bucket of chicken was priced at $10. Finally, assume that 2014 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine real GDP for 2004 and 2014, in 2004 prices. Show your work.
2004 2004 2014 2014 2004 2004 Price bucket $ Price bucket $ Nominal GDP Real GDP Price 10.00 7,000 16 22,000 70,000 70,000 2014 2014 Nominal GDP Real GDP Price 352,000 220,000 10*7,000=70,000 this is for 2004 (nominal GDP) 16*22,000=352,000 this is for 2014 (nominal GDP) 10*22,000=220,000 this is for 2014 (real GDP) The Real GDP price with 2004 prices is $220,000
3. Suppose that in 2004 the total output in a single-good economy was 7,000 buckets of chicken. Also, suppose that in 2004 each bucket of chicken was priced at $10. Finally, assume that 2014 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine real GDP for 2004 and 2014, in 2004 prices. Show your work.
2004: Current Value GDP = 7,000 * $10 = $70,000 2014: Current Value GDP = 22,000 * $16 = $352,000 2004: Real GDP using 2004 prices = 7,000 * $10 = $70,000 2014: Real GDP using 2004 prices = 22,000* $10 = $220,000
bubbles
A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset
Suppose there is an increase in the demand for babysitters. What would we expect to happen to the equilibrium price and quantity of babysitting services? Select one: a. Price will rise, quantity will fall. b. Price and quantity will both rise. c. Price will fall, quantity will rise. d. Price and quantity will both fall.
A/incorrect
3. Please review these three pieces of information in subsection a, b, and c below regarding income and wealth inequality and the idea of "minimum income" (not minimum wage - these are different concepts) as a possible solution. After your review of this material, write a brief response (Two or three paragraphs discussing the main ideas being presented and your thoughts about the material) about this information; note you don't have to write a summary of each subsection, but a well-thought overall summary of the three subsections together. a) Census data on the distribution of income. Quintile (Group of Households) Share of Aggregate Income,1980 Mean Income, 1980 Share of Aggregate Income, 2017 Mean Income, 2017 Poorest 20% 4.2% $12,242 3.1% $13,258 Second 20% 10.2% $30,468 8.2% $35,401 Middle 20% 16.8% $50,276 14.3% $61,564 Fourth 20% 24.7% $74,069 23.0% $99,030 Richest 20% 44.1% $132,065 51.5% $221,846 * Top 5% 16.5% $197,354 22.3% $385,289
All figures in $2017; Source: https://www.census.gov/content/dam/Census/library/publications/2018/demo/p60-263.pdf MHI was $61,372 in 2017, an increase in real terms of 1.8 percent from the 2016 median of $60,309. 3. Answer: Based on the given table of study among Quintile (Group of Households) for Share of Aggregate Income for 1980 and for 2017, as well for Mean Income, 1980 and 2017 American income rose and poverty declined for the third consecutive year in 2017, according to census figures released that suggest more Americans are benefiting from the robust economy. By new data, which provide a broad look at the U.S. economy show that median household income increase to $61,372, and it's an increase of 1.8% when adjusted for inflation. When I reviewed the table B-3 Poverty Status of Families by Type of Family in 1980 and 2017 I can see that the ratio of income has changed in a good way for all families. We can see a percentage has changed as well. For example "All families an average income in 1980 was &57, 804 and in 2017 it rose to $83, 103. The Below Poverty income and the percentage have increased as well. The question is the quality of life has changed much; then I would say in many cases, yes. Today, we have much more programs to support as for the families as for individuals not only for financial support but emotional as well. At the moment I am working at the health insurance that concentrates on the below poverty income families, and I want to share how much they're receiving support. Some families or individuals are receiving free meals daily based on illnesses, cleaning service, visiting services, adult day care services, and much more. I am sure all these services weren't available in 1980 at least I didn't hear about. The case for Free Money has proposed by "one of the most vocal proponents of universal basic income is Charles Murray, who has spent the better part of the last four decades studying and writing about social policy. In 2006, he published In Our Hands: A Plan to Replace the Welfare State" The idea behind was to "give everybody over age 21 $13,000 a year. Compel them to use $3,000 of it on catastrophic health insurance. The payment starts to be taxed when annual income hits $30,000, and it would be up to recipient's decision on how to spend the rest." I think this idea would most likely to bring a boost to the economy as people will spend money on different things, but the end of the day it will come back to the government through taxation. Maybe it will discourage to look for the job some people, but the majority will be appreciating as they're will be able to pay student or car loans, may buy a house, go to the doctors, etc. Maybe this proposition sounds like socialism, but how we can feel the gap of social inequality. We know that population that is raised by a single parent automatically less fortunate than a population raised in families because they have more emotional and financial support.
1. Consider the graph below. Does the curve have a positive or negative slope (circle one)? What are two variables which could be substituted for Y and X in the graph below (and make sense :0)?
Answer: The curve depicts a positive relationship. Provide two variables which would have a positive relationship, such as Y=Price, X=Quantity.
2. Consider the picture representing a society's PPF as shown below (similar to the PPF on p. 46 of your text) with production of military products on the vertical axis and production of domestic consumer products on the horizontal axis. The current administration has proposed building a wall along the southern border of the US. If the US economy is at point B, how would this impact the PPF? Explain your response in a paragraph or two, be sure to include a discussion of opportunity costs.
Basically, the PPF depicts "given the resources we (a society) have, what are the combos of things that can be produced?" Changes to the PPF occur when any of the underlying resources (land, labor, capital, technology, raw materials) change. The PPF is not about prices or supply & demand. So, with respect to a wall on the southern US border you would need to discuss how this could impact the resources available in the US for the production of goods and services and/or the military and if the curve would shift in or out or if the mix of production would change and the US moved along the curve. You could argue either situation in this case.
Inflation and Price Indices (Section 4.4)
Before diving in to this topic, take a step back: what's an index? Your GPA is an index which I am sure you are all familiar and the text provides a great example of index construction using the GPA. Simply stated, an index is a weighted average. The relevant index for our current purposes is the Consumer Price Index (CPI) computed by the Bureau of Labor Statistics (BLS) which provides an index about overall consumer prices (note that when discussing inflation, we're not looking at the price of one good or service but the general increase in prices over all goods and services. The "weight" attached to each commodity is called its "relative importance"; more important consumer items, have higher weights.
Suppose that a small economy produces only one good. In Year 1, the economy's GDP is $500 and the price (per unit) of the good is $10. In Year 2, the economy's GDP is $600 but the price of the good is $12. Using the constant dollar method, what is the real GDP growth rate for this economy from Year 1 to Year 2? Select one: a. 5% b. -20% c. 20% d. 0%
C/20%//IS NOT CORRECT
Which one of the following is an example of human capital? Select one: a. The trust you have in other people b. A factory c. A playground d. Your knowledge of economics
C/is not correct
Simon Kuznets
Commissioned by the US Department of Commerce to develop a system to measure national output
Chapter 6 presents critiques of GDP and poses the following questions: what should we measure and for what purpose? What is GDP an indicator of?
Critiques: 1. GDP is not a measure of social well-being (SWB). We do not get a sense of the well-being or quality of life of a society by looking at GDP. Other measures, such as the GPI, BLI or HDI are more attuned to this. GPI (look at p.23-25): http://issuu.com/genuine-progress/docs/indicator-2006/29?e=7627340/1756730 HDI: http://hdr.undp.org/en/composite/HDI
What is represented by a Lorenz curve? Select one: a. The relationship between inflation and unemployment b. The changes to a capital stock over time c. Depreciation over time d. The distribution of income in a society
D. The distribution of income in a society
A Gini index (or Gini coefficient) equal to 0.25 indicates a society with a very unequal distribution of income. Select one: True False
False
It is generally expected that an economic downturn will lead to an increase in inflation. Select one: True False
False
Keynesians support free markets. They are against government intervention in the economy. Select one: True False
False
The U.S. Census Bureau is the government agency in charge of compiling the national accounts of the United States. Select one: True False
False
The difference between nominal and real GDP is that real GDP includes the foreign sector. Select one: True False
False
The first category of manufactured capital in the national accounts is fixed assets.
Fixed assets include equipment owned by businesses and governments, structures such as factories and office buildings, and residences (i.e., houses and apartment buildings). In 1999, in partial recognition of the increasingly important role of knowledge and technology in production, computer software was added as an additional type of fixed asset
value-added: the value of what a producer sells, less the value of the intermediate inputs it uses, except labor. This is equal to the wages paid out by the producer plus its profits
For example, suppose a steel manufacturer buys $500 worth of iron ore from a mining company and uses this ore to produce steel automobile frames, which it then sells to Ford Motor Company for $1,800 each. The difference between the price of the iron ore and the cost of any other materials needed to convert iron ore into automobile frames, including energy and equipment costs, represents value added. So if the steel manufacturer requires another $200 in additional materials and other costs to produce an automobile frame, then the difference between their total costs ($700) and the selling price ($1,800) is the value added at this stage in production ($1,100). This $1,100 is the amount that is left over after paying for inputs, and it becomes either wages to steel workers or profits to the steel manufacturing company. Similarly, we can determine the value added by Ford Motor Company as the difference between all its input costs (except labor) and the final selling price of the car. If the car sells for $20,000, Ford's value added can be calculated by subtracting the price of the steel, rubber, glass, energy, and all other purchased inputs. Supposing that these added up to $12,000, Ford's value added would be $8,000.
We can summarize the product approach to measuring GDP using the equation:
GDP = Business production + Household and institutions production + Government production
2. Using the following data, select the appropriate categories and compute GDP. All figures are in billions. Show your work. Personal consumption expenditures $245 Wages and salaries 223 Imports 18 Corporate Profits 42 Depreciation 28 Gross private domestic Investment 86 Government purchases 82 Exports 9
GDP = C + I + G + (X-M) GDP = 245 + 86 + 82 + (9-18) = 404
Based on the spending by different sectors, we can summarize the spending approach with the identity
GDP = Household and institution spending + Business spending + Net foreign sector spending + Government spending
The third adjustment in Table 5.4 is what is called the "statistical discrepancy." It reflects the fact that, no matter how diligently the BEA compiles the accounts, it cannot exactly reconcile the results from the income approach with the results from the product and spending approaches. We can summarize the meaningful parts of the income approach by the identity:
GDP = National income − Net income payments from the foreign sector + Depreciation
Or, if we want to highlight the portions that are (by convention) considered consumption versus those considered investment, we can summarize this approach with the identity
GDP = Personal consumption + Private investment + Government consumption + Government investment + Net exports
2. If one method of measuring GDP
GDP is based on production, why aren't we including household (HH) production? Many economic activities occur in the HH but aren't included in GDP. Note here the measurement issue of using replacement cost vs. opportunity cost. We could also look at how much time is spent on activities, and the American Time Use Survey looks at who (men and women) does what. ATUS: https://www.bls.gov/tus/a1_2016.pdf
Which of the following are included in this year's GDP? Explain your answers in each case. b. Government purchases of newly produced aircraft.
Government purchases are included in the GDP for new product and services. . "We know, for example, that governments purchase many intermediate goods, and then produce goods and services." (p. 110 chapter 5)
1. 1. How might human-induced climate destabilization (aka climate change) impact the PPF for the US? Explain your answer in a few sentences below.
Human-induced climate destabilization (aka climate change) would cause the PPF to "shift in" towards the origin and get smaller as many of the resources used in production as well as production itself would decrease. If you made a convincing argument for an increase in the PPF, I'll consider it.
Using the following data, select the appropriate categories and compute GDP. All figures are in billions. Show your work. Personal consumption expenditures $245 Wages and salaries 223 Imports 18 Corporate Profits 42 Depreciation 28 Gross private domestic Investment 86 Government purchases 82
I will say GDP=Personal Consumption Expenditures + Gross Private Domestic Investment +Government Purchases + Exports-Imports 245+86+82+9-18=404 GDP=$404 billions the answer from professor//Using the spending approach, the equation for GDP is C+I+G+NX (consumption, investment, government spending and next exports). Given the information in question 2, you are asked to calculate GDP.
You can see these differences if you look at the BEA Q2 release
I've included in this section. Check out Table 3 on Pgs. 8-10 for the latest data on the components of GDP and note the differences between the nominal figures and those using chained 2012 dollars - the real values.
Which of the following are included in this year's GDP? Explain your answers in each case. a. The money received by Smith when she sells her Biology textbook to a used book buyer.
If I am understanding this correct this sale won't be included in this year GDP, as the used product is not considered a new purchase based on ""Newly produced": Only new goods and services are counted. For example, if you buy a book published in 2010 at a used bookshop, the value of the book itself is not included in this year's GDP. Only the retail services provided by the used bookshop are "newly produced," and are part of this year's GDP" (p. 108 Chapter 5)
Some terminology:
If the overall/general price level decreases = deflation If the overall/general price level increases = inflation If the price of gas increases = the price of gas increases! It's not inflation. If the overall/general price level increases dramatically = hyperinflation
The production-related incomes (such as from wages, rents, and profits) earned by all people and organizations located inside the United States can be summed up in a measure called national income (NI)
If this were a simple economy with no foreign sector and no depreciation, the sum of the incomes from production (NI) would exactly equal GDP. But in our more complex economy, three adjustments are needed to reconcile figures on domestic income and domestic production
Lastly, because in this simple economy everyone who is involved in production also receives monetary payment for their contribution to it, we could, alternatively, take an income approach.
In this approach, we total the compensation received by everyone involved in production, including workers, investors, creditors, and owners of land or equipment rented for productive use.
2. Where does it come from?
Inflation, for the purposes of this class, can come from three places: a) Demand side aka "demand pull" - increases in aggregate demand (AD) put an upward pressure on prices since in the short run, there are not enough products to meet the demand. b) Supply side aka "cost push" - decreases in aggregate supply (AS) due to increases in the cost of production, are passed on to consumers. c) Increases in the Money Supply...more on this in later chapters.
A second—and much smaller—component of the manufactured capital stock is inventories.
Inventories are stocks of raw materials, such as crude oil awaiting refining, or manufactured goods, such as the shoe inventory of a retail shoe store, that are held until they can be used or sold. The BEA only counts inventories held by the business sector
This sort of equation is called an identity or an accounting identity.
It holds simply because of the way in which the various terms have been defined. Once we agree on the definitions of terms, then there remains nothing controversial about an identity. (When we begin to deal with macroeconomic modeling in Chapter 9 we introduce another kind of equation, called a behavioral equation. A behavioral equation represents an economist's supposition about how an economic actor behaves—and because it may or may not hold well in practice, it can be more controversial.)
2. For the graph below, given the situation presented, indicate the impact on demand (D), supply (S), the equilibrium price (p), and quantity (q). To do this, fill in the table to the right of the graph using an upward arrow () to indicate an increase, a downward arrow () to indicate a decrease, an N to indicate no change, and a question mark (?) to indicate that there is not enough information to determine the impact. In the market for oranges, Hurricane Irma destroys 50% of the Florida orange crop.
N? D N S down p increase q decrease
5. Pasta makers estimate that a change in the price of wheat will increase the price of pasta by 25% and decrease the quantity demanded of pasta by 8%; what is the pasta makers' estimate of the price elasticity of demand for pasta? Use the formula on p. 94 of your text.
Ped = | -8%/25% |= .32
. The table below represents the world supply and demand for natural vanilla in thousands of pounds. A large portion of vanilla is grown in Madagascar and comes from orchids that require a lot of time to cultivate. The sequence of events described below actually happened, but the numbers have been altered to make the calculations easier (See James Altucher, "Supply, Demand and Edible Orchids," Financial Times, September 20, 2005, p.12). Assume the original supply and demand curves are represented in the table below.
Price ($/pound) Qty Demand Qty Supply Qty for S1 0 20 0 0 10 16 6 1 20 12 12 2 30 8 18 3 40 4 24 4 50 0 30 5 a. Graph both the supply (label S0) and demand (label D0) curves. What is the current equilibrium price? Label that point a. P=20, Q = 12 b. Assume Madagascar is hit by a hurricane (actually occurred in 2000), and the world's supply of vanilla is reduced by 5/6 or 83%. Label the new supply curve S1. What will the new equilibrium price be in the market? Label that point b. P=40; q=4 the graph in my notebook
CPI (Consumer Price Index)
Since we have to keep the market basket constant over time, a traditional CPI won't adjust for either new products or increases in product quality.
2. Business sector:
The BEA business sector is somewhat broader than just for-profit businesses. Certain business-serving nonprofit organizations, such as trade associations and chambers of commerce, are included in this category. In addition, government agencies that produce goods and services for sale—such as the U.S. Postal Service, municipal gas and electric companies, and airports—are also classified as being in the business sector.
Measuring Gross Domestic Product The BEA publishes tables showing the components of GDP
The BEA publishes tables showing the components of GDP, as well as many other tables dealing with assets, employment, prices, and other topics in the NIPA. (These are easily accessed at www.bea.gov.) To understand these tabulations, however, you need to understand how aggregate production, spending, and income are related in an economic system. Imagine a simple economy with no foreign sector, no depreciation, no inventories, and in which all the profits that companies earn end up in the bank accounts of households. In this case, three quite different measures of counting GDP would in theory all add up to the same number: Value of Production = Value of Spending = Value of Income
Box 5.1 U.S. Economy Contracts for the First Time Since the Great Recession The U.S. Bureau o
The U.S. Bureau of Economic Analysis reported in January 2013 that the U.S. economy contracted for the first time since the Great Recession officially ended in 2009. Real gross domestic product (GDP) for the last quarter of 2012 shrank at an annual rate of 0.1 percent. The decline in GDP was attributed to decreases in private inventory investment, government spending, and exports. The decline in federal defense spending was particularly large, at 22 percent. The BEA also noted that personal consumption expenditures increased by 2.2 percent, with a significant increase in durable goods expenditures of 13.9 percent. Did the decline in GDP suggest the United States in early 2013 was on the brink of anotherrecession? Most economists rejected this idea. The negative influences on GDP were viewed as temporary factors, rather than indicative of a trend. And indeed, GDP growth resumed, though at only moderate rates, later in 2013. It's "the best-looking contraction in U.S. GDP you'll ever see," Paul Ashworth, chief U.S. economist for Capital Economics said in a research note. "The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging." Also, the decline in private inventories was viewed as a sign that businesses would need to increase purchases to restore depleted inventories. In the wake of this report, most economists projected that the economic recovery in the United States would continue, with projections for annual GDP growth of 2.0 percent to 2.5 percent GDP in 2013. Sources: "National Income and Product Accounts Gross Domestic Product, 4th quarter and annual 2012 (advance estimate)," BEA News Release, January 30, 2013; "U.S. Economy Contracts for First Time Since Recession," CNN Money, January 30, 2013.
Foreign sector:
The entities in the first three sectors include, for the national accounts, only those located within the physical borders of the United States. The foreign sector (or "rest of the world") includes all entities—household, nonprofit, business, or government— located outside the borders of the United States. An individual in another country who buys imported U.S. products, for example, or a company located abroad that sells goods or services to the United States, figures into U.S. accounts as part of the foreign sector.
The spending approach adds up the value of newly produced goods and services bought by the household and institution, business, foreign, and government sectors
The estimated values for these expenditures for 2012 are listed in Table 5.3. Purchases of goods and services by households and nonprofit institutions serving households are called "personal consumption expenditures" by the BEA. By convention, they are all considered "final" goods and services (even though, as discussed earlier, many of these are used in household and nonprofit production processes).
Government sector:
The government sector includes all federal, state, and local government entities, except for the "business-like" government enterprises mentioned above.
value-added:
The gross value of the product minus the costs of raw materials and energy. approach to GDP accounting, you start with the raw materials—say, iron ore—used in producing a good or service—say, an automobile—and then see how much market value is added at each stage in the production process
3. Choose a year (2007, 2008, 2009, 2010) and find the annual rate of inflation for Zimbabwe?
There are numerous responses here from 12,000% to 79 million%. a. What does this mean for purchasing power? The purchasing power of the Zimbabwean currency declined dramatically, meaning it took significantly more dollars to purchase goods and services. For example, a loaf of bread cost $10 million Zimbabwean dollars.
Households and institutions sector:
This includes both households and nonprofit institutions that serve households, such as nonprofit hospitals, universities, museums, trade unions, and charities. The BEA also refers to the households and institutions sector as the "personal" sector. (Note how this overlaps with, but is not identical to, the "core sphere" described in Chapter 3.
Nominal VS Real (Section 4.3 is very important)
This is a very important distinction. Nominal or current values are determined using current prices. Real (inflation adjusted) values are determined using a base year of prices. The example in your text using apples and oranges is quite clear in presenting this difference. The issue when using nominal values is that price increases get mistaken for increases in growth, so to get an accurate sense of the increase in GDP, economists use inflation adjusted or real values which use a constant dollar as a base.
Because capitalism is volatile and produces inequality, radical economic theorists argue for a change to a different economic system. Select one: True False
True
PPF" stands for Production Potential Foundation. Select one: True False
True
Wealth in the United States is distributed more equally than income. Select one: True False
True
Value of Production = Value of Spending = Value of Income
Using a production approach, which might seem to be the most natural and direct method, we could sum up the dollar value of all final goods and services produced in each national accounting sector—by the household and institutions sector, the business sector, and the government sector.
purchase power
Value of money as measured by the goods and services it can buy. The PURCHASING POWER OF THE DOLLAR can be determined by comparing an index of consumer prices for a given base year to the present. The amount of physical goods and services that can be bought by a given amount of money.
2. Wage agreements and loan contracts are two types of multi-period agreements that are important for economic growth. Suppose you sign a two-year job contract with TD Bank stipulating that you will receive an annual salary of $93,500 plus an additional 2% over that in the second year to account for expected inflation. a. If the inflation rate turns out to be 3% rather than 2%, who will be hurt by this? Why? b. If the inflation rate turns out to be 1% rather than 2%, who will be hurt by this? Why?
Your salary in year 2 equals: $93,500 * 1.02 = $95, 370 a. If the inflation rate is 3% this means prices have risen 1% more than your COLA (cost of living adjustment) of 2%, so you have taken a 1% reduction in your real wage (your purchasing power). b. If the inflation rate is 1%, this means prices have risen 1% less than your COLA (cost of living adjustment) of 2%, so you have taken a 1% increase in your real wage (your purchasing power).
Consumer Price Index
a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically
Suppose an extremely simple economy produces only two goods, pillows and rugs. In the first year, 50 pillows are produced, and sold at $5 each; 11 rugs are produced, and sold at $50 each. In the second year, 56 pillows are produced, and sold for $5 each; 12 rugs are produced, and sold at $60 each. a. What is nominal (current value) GDP in each of the two years? b. What is the growth rate of nominal (current value) GDP? c. What is real GDP in each year, expressed in terms of constant Year 1 dollars? d. What is the growth rate of real GDP (in constant Year 1 dollars)?
a) What is nominal (current value) GDP in each of the two years? Formula: (Price of good A * Q of good A) + (Price of good B * Q of good B) +....... See table below. b) b. What is the growth rate of nominal (current value) GDP? Growth rate = [(value from most recent year - value from previous year) / value from previous year]*100 Growth rate = (1000-800)/800 = 25% c) What is real GDP in each year, expressed in terms of constant Year 1 dollars? Formula: (P year 1*Q year1) + (P year 1*Q year 2)....... See table below. price of pillows qty of pillows price of rugs qty of rugs Nominal GDP Y1 5 50 50 11 800 Y2 5 56 60 12 1000 price of pillows qty of pillows price of rugs qty of rugs Real GDP (Y1 dollars) Y1 5 50 50 11 800 Y2 5 56 50 12 880 d) d. What is the growth rate of real GDP (in constant Year 1 dollars)? Growth rate = [(value from most recent year - value from previous year) / value from previous year]*100 Growth rate = (880-800)/800 = 10%
4. The monthly supply and demand data for "Brand Q" jeans is outlined in the table below. Price Qty Demand Qty Supply 120 700 1100 110 800 1000 100 900 900 90 1000 800 80 1100 700
a. Equilibrium price is equal to___100___. b. Equilibrium quantity is equal to ___900____. c. Assume initially that the price of Brand Q jeans was set at $120. Would there be a shortage or surplus in this market? ______surplus______________. d. How large would this shortage or surplus be? ___1100-700=400___________________
1. Which of the following are included in this year's GDP? Explain your answers in each case. a. The money received by Smith when she sells her Biology textbook to a used book buyer. b. Government purchases of newly produced aircraft.
a. GDP accounts for newly produced and/or purchased goods and services. A Biology text would have been included in GDP when it was purchased as new, and not again when it's used b. GDP accounts for newly produced and/or purchased goods and services, so the purchase of newly produced aircraft would be included.
. This question refers to Table 1 of the Consumer Price Index: https://www.bls.gov/news.release/cpi.t01.htm a. In the category, "Food At Home", which item has the greatest weight/most importance as of Aug 2019? b. Within this same category, which Item had the greatest price increase from Aug 2018 - Aug 2019
a. In the category, "Food At Home", which item has the greatest weight/most importance as of Aug 2019? "Other food at home" has the greatest weight/most importance since its Relative Importance number is the highest for this subcategory, equaling 1.804. b. Within this same category, which Item had the greatest price increase from Aug 2018 - Aug 2019? In the category, "Food At Home", Nonalcoholic beverages and beverage materials had the greatest price increase during this time period equaling 1.7%.
An increase in the overall price level, commonly known as "inflation" Select one: a. decreases the purchasing power of the dollar. b. doesn't impact purchasing power at all. c. none of the answers listed. d. increases the purchasing power of the dollar.
a. decreases the purchasing power of the dollar.
The four essential economic activities are ... Select one: a. production, consumption, distribution, and resource maintenance. b. production, consumption, distribution, and recycling. c. extraction, consumption, distribution, and resource maintenance. d. production, distribution, recycling, and resource maintenance
a. production, consumption, distribution, and resource maintenance.
closed economy:
an economy with no foreign sector. Although sometimes countries isolate themselves from world trade
The common term for a side effect of a market transaction that affects those not involved in the transaction is ... Select one: a. an externality. b. a transaction cost. c. a free rider. d. an implicit contract.
an externality.
inflation
an increase in a currancy supply relative to the number of people using it, resulting in rising prices of good s and services over time
negative percent changes in the price level
are referred to as deflation, or negative inflation
Before we focus on how GDP is measured, we first need to discuss some of the "conventions," or assumptions, used in the NIPA. National accounting conventions
are simply habits or agreements, adopted by agencies in order to try to make the accounts as standardized and comparable across different countries and periods as possible. Some of these conventions concern how data are categorized. For example, there are conventions concerning what is classified as investment versus consumption or a durable versus a nondurable good. Other conventions address how estimates are made for some components of the NIPA for which readily available data are lacking. Of course, there are alternatives to the common conventions, but the emphasis is on standardization rather than always choosing the "best" approach.
to mesure one inflation from year one to year two (specifically, the percent change in prices)
as its name suggests, the GDP deflator can be used to take inflation out of GDP, i.e. to "Deflate" GDP, since Real GDP = Nominal GDP / GDP dfatator x 100
if you got 2% of rate at your job
but the prices went up 5%, so that means you didn't got a raise. you actually loosing 3% of your purchasing power
*A closely related measure is gross national product (GNP). The difference between GNP and GDP
concerns whether foreign earnings are included. GNP includes the earnings of a country's citizens and corporations regardless of where they are located in the world. GDP includes all earnings within a country's borders, even the earnings of foreign citizens and corporations. GDP is the more common measure used when comparing international statistics.
consumer durable goods:
consumer purchases that are expected to last longer than three years. These are generally items of equipment, such as vehicles and appliances, used by households to produce goods and services for their own use. In 2003, the BEA began including consumer durables in its accounts of assets. The BEA estimates of the dollar value of the country's stock of manufactured assets at the end of 2011 are given in Table 5.1.
The two key features that make an economy capitalist are: Select one: a. Markets and wage labor b. Production for profit and markets c. Production for profit and democratic political institutions d. Production for profit and wage labor
d. Production for profit and wage labor
Which one following will NOT result in a shift in the supply curve for clothing? Select one: a. A change in the technology used to make clothing. b. The cost of cotton increases as a result of a draught. c. The number of clothing manufacturers increases. d. The incomes of people purchasing clothes incre
d. The incomes of people purchasing clothes increase.
Which one following will NOT result in a shift in the supply curve for clothing? Select one: a. A change in the technology used to make clothing. b. The cost of cotton increases as a result of a draught. c. The number of clothing manufacturers increases. d. The incomes of people purchasing clothes increase.
d. The incomes of people purchasing clothes increase.
Suppose that the price of peanut butter increases. What would we expect to happen in the market for jelly (a complement for peanut butter)? Select one: a. The price will decrease and the quantity sold will increase. b. The price will increase and the quantity sold will decrease. c. The price and quantity sold will both increase. d. The price and quantity sold will both decrease.
d. The price and quantity sold will both decrease
Which one of the following would, in principle, be counted in an estimate of the gross domestic product of the United States? Select one: a. The value of a book you buy from a used bookstore. b. The value of the steel Ford Motor Company buys to make cars. c. The value of a CD you give a friend in exchange for having helped you study. d. The value of a new CD you buy from a store.
d. The value of a new CD you buy from a store.
According to the text, the three major macroeconomic goals are ... Select one: a. economic growth, stability and security, and good living standards. b. low inflation, low unemployment, and well-being. c. economic growth, well-being, and good living standards. d. good living standards, stability and security, and sustainability.
d. good living standards, stability and security, and sustainability.
Note that the foreign sector
does not contribute to the production of GDP in the above equation. Can you explain why? (Hint: Look back at the definition of GDP.) Table 5.2 presents the BEA estimate of GDP in 2012 using the product approach, divided into national accounting sectors and subsectors. Not surprisingly, given the conventions and accounting procedures, the BEA attributes a very large share of productive activity to the business sector
Adjusting for Inflation Formula
first pick up a list of goods what consumers are buying through the year, like rent, gas, food instead of movie ticket. They adding baskets for each year, then it's creating a long list, then they pick a base year. any year you want and deviding a basket cost of each year by the busket of the base year and multiply by 100
For example, U.S. GDP in 2011 was estimated at $15.08 trillion, while in 2012 it was estimated at $15.68 trillion. Fitting these into the equation, we have
growth rate of GDP =15.68 -15.08 : 15.08 x 100=0.04 x 100= 4.0 indicating that GDP grew 4.0 percent between 2011 and 2012. The BEA and newspapers commonly report the GDP growth rates for quarters, expressed in terms of an "annual growth rate." This is a measure of how much the economy would grow if it were to continue to expand for the entire year at the speed reported for the three-month period.
So to compute the growth rate of GDP from, say, 2011 to 2012, we calculate
growth rate of GDP =GDP2012 - GDP2011 : GDP2011 x 100
The BLS calculates the number of dollars required to buy a certain basket of goods in a certain benchmark yea
h as 1982, and determines how many dollars would have been needed in another year, such as 2009 to buy the same basket of goods. The ratio between the two determines the CPI. For example, in 2002, the CPI = 179.9 relative to the benchmark year 1982, where it = 100. That means that $1.799 in 2002 had the same purchasing power as $1 in 1982.
In this very simple economy
if, say, $10 billion worth of goods and services is produced, then the amount spent on goods and services must also be $10 billion and the amount of payment received as income must also be $10 billion. Sometimes in dealing with national accounts economists hence use the terms "production," "income," and "expenditure" interchangeably. While there is a rough equivalence in theory among the product, spending, and income approaches to calculating GDP, making estimates for an actual economy requires a number of conventions and adjustments. We now consider each approach in more detail.
Gross Domestic Product (GDP)
is the monetary value of all final goods and services (G & S) produced, purchased, etc. in an economy in a particular time period (quarter, year). Note the difference between intermediate and final goods.
The Bureau of Economic Analysis (BEA)
keeps track of GDP and NIA for the US and divides the US economy into 4 sectors for analysis: Households (HH), Business (I), Government (G) and the foreign sector (X-M).
"Nominal"
means a price from the past that hasn't been adjusted for inflation. So the highest "nominal" box office receipts list is quiet different
"Real"
means that a price from the past has been adjusted for inflation.
Net exports
measures the overall impact of international trade on GDP. It is the difference between exports and imports: Net exports = Exports - Imports
The value of the next best alternative that is foregone when a choice is made is called ... Select one: a. opportunity cost. b. scarcity cost. c. tradeoff cost. d. efficiency cost.
opportunity cost
So far, we have concentrated on calculating GDP in only one year. To calculate rates of economic growth, economists must look at how GDP changes over time. The percentage change in GDP from year to year can be calculated using the standard percentage-change formula. The standard formula, for something that takes one value in year 1 (Value1) and another in year 2 (Value2), is:
percentage change Value Value Value = − × 2 1 1 100 % change=Value2-Value1 : Value1 x 100
Your text outlines three methods to compute GDP (p.109):
production method, income method and spending method. The end result of all of these methods is the same number for GDP, which is why you'll see the following: production = income = spending. Our focus (and that of your text) is on section 3.2, the spending approach.
The economic indicator which uses a weighted-average to compute changes in the general price level is called.... Select one: a. the GPI b. the HDI c. the BLI d. the CPI Feedback The correct answer is
the CPI
base year (in the constant-dollar method of estimating GDP):
the year whose prices are chosen for evaluating production in all years. Normally real and nominal GDP are equal only in the base year. The constant-dollar method uses prices from one particular year, called the base year, to evaluate the value of production in all years. Constant-dollar real GDP is calculated by doing the same sort of multiplying and summing exercise as shown in Table 5.5, but using the same prices for all years: Constant-Dollar Real GDP = Total production valued at base year prices
In many cases the BEA uses imputation
to estimate the value of components of GDP. An imputation is a sort of educated guess, usually based on the value of similar outputs or on the value of inputs used in production. For example, the housing stock of a country produces a flow of services—the services of shelter. For housing units that are rented, the rent paid is the market value of the housing services. But how can we find out the value of the services generated by houses occupied by their owners? For these, the BEA must impute a value. They use data from the rental housing market to impute what owner-occupiers might be said to be "paying in rent" to themselves.
According to the text, a surplus occurs whenever the quantity that sellers wish to sell exceeds the quantity people are willing to buy. Select one: True False
true
Beginning in the late 1970s, global capitalism entered a distinct and more aggressive phase called, "Neoliberalism". Select one: True False
true
Trust is an institutional requirement of a market. Select one: True False
true
how economiest mesure a world inflation
using that mesure they can adjust prices from the past into today's dollars.
Using the spending approach
we could look at who buys the final goods and services that have been produced. Since we assumed that no goods are carried as inventory in this very simple economy, everything produced must be bought. Totaling the dollar value of spending on all various kinds of goods and services by all sectors in this imaginary simple economy will indicate a second way of arriving at the figure for a country's aggregate production.
If we want to know if/how prices changed,
we look at the growth rate of these indices and use the same formula for growth as above, but apply it to the CPI (or index in question). Check out the most recent BLS data release which is included in the materials available for this week.
. Because the United States is an open economy
we need to take into account interactions with the foreign sector. Some of the goods and services produced inside the United States are bought by entities in the foreign sector. The value of these exported goods must be added to the value of domestic spending in calculating GDP. In addition, some of the spending by U.S. residents is for goods and services produced abroad.