Macroeconomics Chapter 7

Select all of the benefits of national income accounting.

(1) Enables formulation of policies to improve or safeguard the economy's health (2) Tracks the long-run course of the economy (3) Assesses the health of the economy

What of following are components of government purchase in GDP?

(1) Expenditures for publicly owned capital (2) Expenditures for goods and services that the government consumes in providing public services

What are the two ways to adjust nominal GDP to reflect price changes?

(1) Multiple the current year's output by price of the output in the base year (2) Nominal GDP divided by the price index

After calculating national income, which of the following is added to national income to obtain GDP?

(1) Statistical discrepancy (2) Consumption of fixed capital

Which of the following are the domestic sectors of the U.S. economy?

(1) U.S. businesses (2) U.S. households (3) U.S. Government

According to the International Monetary Fund, which three countries had the highest GDPs?

(1) United States (2) China (3) Japan

A price index:

(1) always includes a base year (2) is normalized to 100 for the base year (3) measures the cost of purchasing a market basket of output across different years

National income accountants subdivide corporate profits into which categories?

(1) corporate income taxes (2) dividends (3) undistributed corporate profits

A final good is

(1) counted as part of GDP (2) a good directly consumed by individuals or businesses

Which of the following are part of taxes on production and imports?

(1) custom duties (2) business properties taxes (3) license fees (4) excise fees (5) general sales taxes

As a measurement of economic output and the nation's wealth, GDP fails to account for:

(1) improved product quality (2) leisure time (3) non-market activities (4) the underground economy

Private domestic investment expenditures consist of:

(1) spending on new plant and equipment (2) newly produced housing (3) any increase in inventories

For the purposes of GDP accounting, government purchases include __________.

(1) the purchase of new military equipment (2) spending on highway construction

The following items comprise national income:

(1) proprietors' income (2) corporate profits (3) taxes on production and imports (4) rents (5) compensation of employees (6) interest (7) American salaries earned abroad

What are the three categories of personal consumption expenditures?

(1) services (2) durable consumer goods (3) nondurable consumer goods

Disposable income equals:

personal income minus personal taxes

GDP formula is

C + i g + G + xn

the market value of a firm's output minus the value of the inputs The Firm has bought from others is called

value added

and intangible services

(dry cleaning, concerts, cell phone service)

GDP includes tangible goods

(like DVDs, mountain bikes, beer)

Sources of BEA Data (Investment)

- All consumption data sources - Census Bureau's Housing Starts Survey and Housing Sales Survey - Retail Trade Survey - Wholesale Trade Survey - Survey of Manufacturing

Goods are valued at their market prices, so:

- All goods measured in the same units (e.g., dollars in the U.S.) - Things that don't have a market value are excluded, e.g., housework you do for yourself.

Investment Includes Spending on...

- Capital equipment (e.g., machines, tools) - Structures (factories, office buildings, houses) - Inventories (goods produced but not yet sold)

Sources of BEA Data (Consumption)

- Census Bureau's Retail Trade Survey - Census Bureau's Survey of Manufacturers - Census Bureau's Service Survey - Industry Trade Sources

Income Approach

- Count income derived from production - Wages, rental income, interest income, profit

Personal consumption expenditures (C)

- Durable goods - Nondurable goods - Consumer expenditures for services

Gross Private Domestic Investment (Ig)

- Machinery, equipment, and tools - All construction - Positive and negative changes in inventories - Noninvestment transactions excluded

Avoid Multiple Counting

- Market value final goods - Ignore intermediate goods - Count value added

Net Exports (NX)

- NX = exports - imports - Exports represent foreign spending on the economy's g&s - Imports are the portions of C, I, and G that are spent on g&s produced abroad

Exclude Financial Transactions

- Public transfer payments - Private transfer payments - Stock market transactions

Real GDP

- Reflect changes in the price level - Use base year price

From National Income to GDP

- Subtract net foreign factor income - Statistical discrepancy - Consumption of fixed capital

The Components of GDP

1. Consumption (C) 2. Investment (I) 3. Government Purchases (G) 4. Net Exports (NX) Y = C + I + G + NX

the value of the GDP price index will be__________ for the base year

100

if the price of a market basket of goods in year 1 is $10 and $25 in year 3 and the base year is year one and the price index is for year 3 is

250

if nominal GDP is $140 and the price index is 200 then the real GDP equals

70

Inventory

A firm's stock of unsold goods

National Income (NI)

A measure of the income payments that actually go to resources

GDP Deflator

A measure of the overall level of prices

Price Index

A normalized average (typically a weighted average) of price relatives for a given class of goods or services in a given region, during a given interval of time

Government Purchases (G)

All spending on the g&s purchased by govt at the federal, state, and local levels

Service

An economic activity where an immaterial exchange of value occurs

Capital Consumption Allowance (CCA) Depreciation

An estimate of the value of capital goods "used up" in the period's production; It is the cost of the wear and tear on the machines and factories; CCA is depreciation, plus the value of capital lost due to accidental damage

Nominal GDP

Based on prices that prevailed when output was produced

What is the agency that compiles statistics about the economy?

Bureau of Economic Analysis

using the expenditure approach which of the following most closely defines the consumption of GDP

C + i g + G + xn

Which of the following is the largest component of national income?

Compensation of employees by firms

Inflation Rate

Compute the percentage increase in the GDP deflator from one year to the next

Consumption for Renters

Consumption includes rent payments

Consumption for Homeowners

Consumption includes the imputed rental value of the house, but not the purchase price or mortgage payments

Expenditure Approach

Count sum of money spent buying the final goods

Net Investment

Excludes replacement investment

Two Ways of Measuring GDP

Expenditures (of final goods) and Income Received (for producing final goods)

__________ goods are included in the calculation of GDP while __________ goods are not included.

Final; intermediate

GDP as Output Produced

GDP includes all output sold PLUS all goods produced but not sold.

Net Domestic Product (NGP)

GDP that is net of depreciation—depreciation has been substracted from it; NGP includes net investment instead of gross investment

Durable Goods

Goods not for immediate consumption and able to be kept for a period of time

Which of the following is equal to net investment?

Gross investment minus depreciation

Final Goods

Intended for the end user; GDP only includes final goods—they already embody the value of the intermediate goods used in their production.

__________ consists of the money paid by private businesses to the suppliers of loans used to purchase capital.

Interest

Which of the following measures the economy's overall performance?

National income accounting

By ignoring the value of leisure time, how does national income accounting affect our well-being?

It understates our well-being

as a measurement of economic output and the nation's wealth GDP fails to account for

Leisure Time the underground economy non-market activities improve product quality

National Income Accounting

Measure's economy's overall performance - Assess health of economy - Track long run course - Formulate policy

Gross Domestic Product (GDP)

Measures total income of everyone in the economy; GDP also measures total expenditure on the economy's output of g&s

__________ GDP uses current prices while __________ GDP uses prices adjusted for inflation.

Nominal;Real

Disposable Personal Income

PI minus personal taxes. It is "after-tax" personal income; DPI is the income that individuals have at their disposal for spending or saving

Proprietors' Income

Paid directly to sole proprietors

a measure of the value of a specified collection of goods and services in a given year as compared to the value of a Highly similar collection of goods and services in a reference year is called a

Price Index

__________ transfer payments are excluded from GDP because they produce no output and are simply a transfer of funds from one private individual to another.

Private

__________ __________ consists of net income of sole proprietorships, partnerships and other unincorporated businesses.

Proprietor's income

Planned Inventory Changes

Reflect management's decision to add to or to reduce its on-hand stock

Unplanned Inventory Changes

Reflect the results of unexpected sales variations

__________ is the income received by households and businesses that supply property resources.

Rent

Exclude second hand sales

Sell used car to a friend

what are the three categories of personal consumption expenditures

Services non-durable consumer goods durable consumer goods

G Excludes Transfer Payments

Such as Social Security or unemployment insurance benefits; They are not purchases of g&s

Taxes on Production and Imports

Taxes collected by businesses and turned over to the governments

(1) GDP is...

The MARKET VALUE of all final goods & services produced within a country in a given period of time.

Rent

The income earned from selling the use of real estate

Net Factor Income from Abroad

The income that foreigners earn producing goods within the borders of a country minus the income Americans earn abroad

Personal Income (PI)

The income with which individuals pay personal taxes, save, and consume

Wages

The largest category. This category includes insurance, social security and retirement contributions

(2) GDP is...

The market value of all FINAL goods & services produced within a country in a given period of time.

(3) GDP is...

The market value of all final GOODS & SERVICES produced within a country in a given period of time.

(4) GDP is...

The market value of all final goods & services PRODUCED within a country in a given period of time. - GDP includes currently produced goods, not goods produced in the past.

(5) GDP is...

The market value of all final goods & services produced WITHIN A COUNTRY in a given period of time.

(6) GDP is...

The market value of all final goods & services produced within a country in a GIVEN PERIOD OF TIME.

Interest

The net expense interest paid

Investment is not..

The purchase of financial assets like stocks and bonds

Which of the following is not included in investment spending in the national income accounts?

The purchase of stocks and bonds

Nondurable Goods

They may be defined either as goods that are immediately consumed in one use or ones that have a lifespan of less than 3 years

Gross Investment

Total investment, which includes investment expenditures that simply replace worn out capital goods. Such replacement investment does not add to the total capital stock

Consumption (C)

Total spending by households on g&s

Investment (I)

Total spending on goods that will be used in the future to produce more goods

True or false: GDP only counts final goods and services to avoid multiple counting of goods.

True

according to the international monetary fund which three countries had the highest GDP us

United States China and Japan

Intermediate Goods

Used as components or ingredients in the production of other goods

an intermediate good is

a good used only in the production of other products

The primary measure of the economy's performance is its annual total output of goods and services, which is called its:

aggregate output

the primary measure of the economy's performance is its annual total output of goods and services which is called its

aggregate output

GDP does not reveal if the current product mix of goods and services is enriching or potentially detrimental to society because:

all products are assigned the same weight if they sell for the same price

Aggregate output is the primary measure of the economy's:

annual total output of goods and services

Secondhand sales are excluded from the calculation of GDP because they:

are not produced in the current year

Gross Domestic Product (GDP) may be calculated as the sum of

consumer spending, investment spending, government purchases of goods and services, and exports minus imports

Gross domestic product calculations count only final goods and services because:

counting all intermediate goods and services would lead to double-counting of many activities

If net investment is negative, the capital stock has __________. If net investment is positive, the capital stock has __________.

decreased; increased

in the circular flow diagram firm's_________ inputs and household __________goods and services

demand demand

Consumption of fixed capital is the __________ charge made against private and publicly owned capital each year.

depreciation

Gross rental income minus __________ equals net rent.

depreciation

Net domestic product is gross domestic product less:

depreciation

The amount of income that households have left over after paying their personal taxes is:

disposable income

all the final purchases of Machinery equipment and tools by business enterprises including construction and changes in inventories make up gross private_________ investment

domestic

net exports include Goods produced

domestically that are sold abroad less Goods that are produced abroad that are sold

Goods that are produced in a particular period but NOT sold in that period:

end up in inventories and are included in investment

Goods that are produced in a particular period but not sold in that period

end up in inventories and are included in investment

which approach to Judy head as of all the spending on final goods and services that has taken place throughout the year

expenditures approach

We measure gross domestic product by multiplying the quantities of goods by their prices because it allows us to:

express the values of products in a common unit of measurement

Consumption goods, capital goods and services purchased by their ultimate users are called __________ goods.

final

consumption goods, capital goods and services purchased by their ultimate users are called_________goods

final

gross private domestic investment includes

final purchases of Machinery equipment and tools by business enterprises all construction and changes in

_________ goods are included in the calculation of GDP while __________goods are not included

final; intermediate

The three domestic sectors of the economy are households, government, and __________.

firms

what are the three domestic sectors of the economy

firms government households

According to McConnell, the value of underground transactions in the U.S. is between __________ and __________ percent of recorded GDP.

five; ten

The purpose of retained earnings is to save money for:

future investments in capital

The dollar value of all final goods and services produced within the borders of a given country during a given period of time is the definition of:

gross domestic product

the dollar value of all final goods and services produced within the borders of a given country during a given. Of time is the definition of

gross domestic product

which of the following is equal to net investment

gross investment minus depreciation

Net exports is exports minus __________.

imports

Nominal GDP measures the value of all goods and services:

in current dollars

nominal GDP measures the value of all goods and services

in current dollars

National ____________accounting measures the overall performance of the economy.

income

Viewing GDP in terms of earning derived or created by producing something is called the __________ approach.

income

Viewing GDP in terms of earnings derived or created by producing something is called the __________ approach.

income

Goods and services that are used up in the production of final goods are called __________ goods.

intermediate

Including the value of __________ goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.

intermediate

Including the value of _________goods along with the value of final goods in the calculation of GDP

intermediate

The three types of domestic investment include all final purchases of machinery, equipment, and tools; all construction; and changes in business __________.

inventories

the three types of private domestic investment include all final purchases of Machinery equipment and tools all construction and changes in business___________.

inventories

When gross investment is __________ depreciation, net investment is negative.

less than

Economists compare the __________ value of the total output in various years, rather than volumes of production.

market; actual

Income earned through the use of American-owned resources for services and production is called __________ income.

national

When dealing with international trade, economists include __________ as a component of GDP.

net exports

when dealing with International Trade Economist include__________ as a component of GDP

net exports

The difference between the income Americans earn abroad and the income they earn in the United States is called __________ __________ factor income.

net foreign

___________ is computed using current prices

nominal GDP

___________GDP is the current price while__________ GDP uses prices adjusted for inflation

nominal, real

as a measurement of economic output and the nation's wealth GDP fails to account for

non-market activities improved product quality Leisure Time the underground economy

GDP may be understated because

nonmarket activities are not included in GDP

Transfer payments are excluded from government purchases in GDP accounting because

nothing is being produced in return for the payment

transfer payments are excluded from government purchases in GDP accounting because

nothing is being produced in return for the payment

The term that covers all expenditures by households is __________ __________ expenditures.

personal consumption

the term that covers all expenditures by households is ______________expenditures

personal consumption

which of the following are components of the expenditure approach to measuring GDP

personal consumption expenditures government purchases gross private domestic investment

The amount of income that households receive, whether earned or unearned, is called:

personal income

disposable income equals

personal income minus personal taxes

_____________ transfer payments are excluded from GDP because they produce no output and are simply a transfer of funds from one private individual to another

private

Imports must be subtracted from GDP because they are goods and services __________ the borders of the United States.

produced outside

Imports must be subtracted from GDP because they are goods and services____________ the borders of the United States

produced outside

A country's exports are included in GDP when the goods and services are:

produced within the borders of said country

a country's exports are included in GDP when the goods and services are

produced within the borders of said country

Government __________, officially labeled "government consumption expenditures and gross investment," include all federal, state, and local government outlays on final goods.

purchases

government ________officially labeled government consumption expenditures and gross investment include all federal state and local government outlays on final goods

purchases

________GDP or adjusted GDP reflects changes in the price level

real

when GDP is measured using adjustments for price changes it is known as

real GDP

The main reason to participate in the underground economy is to avoid

reporting actual income and paying income taxes

which of the following is counted as gross private domestic investment A spending on Legal Services B investing in stocks and bonds C residential construction D spending on automobiles

residential construction

Undistributed corporate profits are called __________ __________.

retained earnings

consumers are free to divide their income between consumption and

saving

Consumers are free to divide their income between consumption and __________.

savings

The __________ costs of negative gross domestic by-products reduce a nation's __________ well-being.

social; economic

for the purposes of GDP accounting government purchases include

spending on Highway construction the purchase of new military

The amount accountants add to national income to make the income approach match the outcome of the expenditures approach is called the __________ discrepancy.

statistical

Depreciation of capital is __________.

the annual amount allocated to wear and tear on private investment

Depreciation of capital is __________..

the annual amount allocated to wear and tear on private investment.

In national income accounts, value added refers to:

the difference in the market value and the cost of inputs purchased from other firms

the formula for calculating price index is

the price of a Market Basket in a specific year divided by the price of the same Market Basket in the base year x 100

The formula for calculating a price index is

the price of a market basket in a specific year divided by the price of the same market basket in the base year multiplied by 100

which of the following is not included in investment spending in the national income accounts

the purchase of stocks and bonds

which of the following is not included in investment spending in the national income accounts? A the purchase of machinery and other productive physical capital be spending on inventories see the purchase of stocks and bonds d new residential construction

the purchase of stocks and bonds

gross private domestic investment includes____________.

the total amount of private investment in replacement capital and an added capital

The use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because

the value of money itself changes

GDP measures...

the value of production that occurs within a country's borders, whether done by its own citizens or by foreigners located there

Real GDP is gross domestic product measured

to reflect changes in the price level

select all the benefits of national income accounting

tracks the long run course of the economy assesses the health of the economy and Abel's formulation of policies to improve or Safeguard the economy's health

Social Security payments welfare payments and Veteran's payments that the government makes directly to households are called government public __________payments

transfer

Social Security payments, welfare payments, and veterans' payments that the government makes directly to households are called government public __________ payments.

transfer

true or false GDP only counts final goods and services to avoid multiple accounting of goods

true

which of the following are domestic sectors of the US economy

u.s. government us households us businesses

The sale of __________ is excluded from the calculation of GDP because they contribute nothing to current production.

used goods

The market value of a firm's output minus the value of the inputs the firm has bought from others is called

value added

The real-world, more complex GDP price index used in the United States is called the chain-type annual __________ price index.

weights

the real world more complex GDP price index used in the United States is called the chain type annual ___________price index

weights

inflows of disposable income and outflows of consumption spending and saving take place __________while inflows of revenue from taxes and outflows in the form of purchases and transfers take place

within households within government

When gross investment and depreciation are equal, the value of net investment is __________.

zero