Econ Chapter 8

​"If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline."

Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall.

​"If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined."

Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined.

What are the four major components of expenditures in​ GDP?

Consumption, Investment, Government​ Purchases, and Net Exports

An article in the Wall Street Journal states that a change in inventories​ "dragged down the overall growth in GDP by nearly a full percentage​ point" below what it otherwise would have been. ​Source: Josh​ Mitchell, "U.S. GDP Growth Slowed on Tepid​ Consumer," Wall Street Journal​, April​ 28, 2017. For this result to​ occur, is it likely that inventories increased or​ decreased? Briefly explain.

Decreased, since inventories are part of a​ firm's investment, which is a component of​ GDP, inventories must have fallen.

An article in the Wall Street Journal states the​ following: ​"GDP figures are a measure of all the goods and services that are produced in an economy during a particular​ period." ​Source: Jon​ Sindreu, "Why U.S. GDP Figures Might Be Better than They​ Look," Wall Street Journal​, July​ 29, 2016. Briefly explain whether you agree with this definition of GDP.

Disagree, because GDP measures the value of all final goods and services produced in an​ economy, not all the goods and services produced.

​"If nominal GDP is less than real​ GDP, then the price level must have fallen during the​ year."

Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.

"Whenever real GDP ​declines, nominal GDP must also​ decline."

Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

If you were attempting to forecast the level of consumer spending by​ households, which measure of total production or total income might be most helpful in making your​ forecast?

Disposable personal income

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

Even if GDP included these types of​ production, why would it still be an imperfect measure of economic​ well-being?

GDP is not adjusted for crime or other social problems. GDP is not adjusted for pollution and it does not account for unequal income distribution. The value of leisure is not included in GDP.

When a significant fraction of domestic production takes place in​ foreign-owned facilities, a​ country's difference between GDP and GNP is as​ follows:

GDP will be much larger than GNP.

U.S. Gross National Product​ (GNP) differs from U.S. Gross Domestic Product​ (GDP) in which of the following​ ways?

GNP is the value of final goods and services produced by residents of the U.S. GNP considers production that occurs outside the U.S. In the United​ States, the difference between GNP and GDP is smaller than that of many other countries.

GDP is an imperfect measure of economic​ well-being because it fails to measure what types of​ production?

Household production and the underground economy.

Suppose a house is built and sold in the year 2008. If the house is resold in the year​ 2019, is the value of the house included in Gross Domestic ProductLOADING... ​(GDP) for​ 2019?

No. GDP for 2019 includes only production that occurs during 2019.

Which of the following would be included in the gross national product​ (GNP) of the United​ States?

Production from a U.S. firm that operates in Mexico.

How does real GDP deal with the problem inflation causes with nominal​ GDP?

Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. Real GDP separates price changes from quantity changes. By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced.

What is the difference between the value of a​ firm's final product and the value added by the firm to the final​ product?

The value of a​ firm's final product is the sale​ price; value added is the difference between the sale price and the price of intermediate goods.

What are the four categories of​ income?

Wages, Interest,​ Rent, and Profit.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next?

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities.

Would the services of a real estate agent who helped sell​ (or helped​ buy) the house be included in GDP for​ 2019?

Yes. GDP for 2019 includes the market value of final goods and services. This includes real estate services.

To calculate personal income from national​ income, which of the following must the BEA​ do?

add government transfer payments

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government.

A breakdown of the four components of GDP shows that

consumption is by far the largest expenditure​ category, and that consumer spending on services far exceeds consumer spending on goods.

Inventories are part of investment and therefore included in GDP because

firms produce​ goods, however sometimes the goods may be unsold at the time GDP is computed.

The​ circular-flow diagram shows that all sources of income are owned by

households.

Personal Income is

national income minus retained corporate earnings plus government transfer payments and interest on government bonds.

Some countries have larger underground economies than do other​ countries, because

of government policies that are retarding economic growth.

Disposable personal income is

personal income minus personal taxes.

Over​ time, prices may change relative to each other. To take this change into​ account, the Bureau of Economic Analysis calculates

real GDP using chain weights.

In calculating​ GDP, which levels of government spending are included in government​ purchases?

spending by​ federal, state, and local governments

Gross Domestic Product​ (GDP) is

the market value of all final goods and services produced in a country during a period of time.

Which of the following is included in the​ economist's definition of​ investment?

the purchase of new​ machines, factories, or houses

The​ circular-flow diagram shows that​ ________ should equal​ ________.

total​ expenditure; total income

Transfer payments are not included in GDP calculations because

transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service.

In​ 2016, the largest component of gross domestic income was

wages.

Indicate whether you agree or disagree with the following​ statement: ​"In years when people buy few shares of​ stock, investment will be low ​and, therefore, so will gross domestic productLOADING... ​(GDP)."

​Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and​ inventory, not stock purchases.

If the U.S. Bureau of Economic Analysis​ (BEA) added up the values of every good and service sold during the​ year, would the total be larger or smaller than measured gross domestic product​ (GDP)?

​Larger: The value of all goods and services sold would include intermediate goods.