Macroeconomics midterm study guide
In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government purchases were $1500, imports were $600, and investment was $2000. What was Wrexington's consumption in 2008?
$3000
A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,
U.S. investment and GDP increase, but German GDP is unaffected.
In the actual economy, households
divide their income among spending, taxes, and saving
The consumption component of GDP includes spending on
durable goods, nondurable goods, and services.
An important factor in the decline of the U.S. textile industry over the past 100 or so years is
foreign competitors that can produce quality textile goods at low cost.
A transfer payment is a payment made by
government, but not in exchange for a currently produced good or service.
The nation of Waterland forbids international trade. In Waterland, you can obtain a computer by trading 2 bicycles. In other countries, you can obtain a computer by trading 3 bicycles. These facts indicate that
if Waterland were to allow trade, it would export computers.
. Goods that go into inventory and are not sold during the current period are
included in current period GDP as inventory investment.
If an economy's GDP falls, then it must be the case that the economy's
income and expenditure both fall.
For an economy as a whole,
income must equal expenditure.
GDP is equal to
the market value of all final goods and services produced within a country in a given period of time. Y. C + I + G + NX
A logical starting point from which the study of international trade begins is
the principle of comparative advantage
Gross domestic product measures two things at once:
the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
GDP does not reflect
the value of leisure, the value of goods and services produced at home, the quality of the environment
Which of the following tools and concepts is useful in the analysis of international trade?
total surplus domestic supply equilibrium price
In the economy of Wrexington in 2008, consumption was $6000, exports were $1000, GDP was $10,000, government purchases were $2000, and imports were $600. What was Wrexington's investment in 2008?
$1600
In the economy of Wrexington in 2008, consumption was $3000, exports were $200, GDP was $8000, government purchases were $1000, and imports were $600. What was Wrexington's investment in 2008?
$4400
List the three major problems in using the CPI as a measure of the cost of living. 2. Why does the GDP deflator give a different rate of inflation than the CPI?
(1) Substitution bias. The CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive. (2) Introduction of new goods. Because the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced. (3) Unmeasured quality change. Not all quality changes can be measured. The GDP deflator and the CPI differ in two important ways. The GDP deflator uses as a basket all final goods and services produced in the domestic economy, while the CPI basket includes goods and services purchased by typical consumers. Therefore, changes in the price of imported goods affect the CPI, but not the GDP deflator. Also, changes in the price of domestically produced capital goods affect the GDP deflator, but not the CPI. Changes in the price of domestically produced consumer goods are likely to affect the CPI more than the GDP deflator because it is likely that those goods make up a larger part of consumer budgets than of GDP.
A tariff is a
A tax on imported goods
GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.
GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods.
GDP is not a perfect measure of well-being; for example
GDP fails to account for the quality of the environment.
Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that
GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.
Which of the following statements about GDP is correct?
GDP is to a nation's economy as household income is to a household
Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?
GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of housing services.
GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society is
GDP per person.
Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct?
GDP would definitely increase because GDP excludes leisure.
Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person?
It was unchanged.
You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.
Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased.
Which of the following is correct? a. The market value of rental housing services is included in GDP, but the market value of owner-occupied housing services is not. b. The market value of owner-occupied housing services is included in GDP, but the market value of rental housing services is not. c. The market vIn the equation Y = C + I + G + NXalues of both owner-occupied housing services and rental housing services are included in GDP. d. Neither the market value of owner-occupied housing services nor the market value of rental housing services is included in GDP.
The market values of both owner-occupied housing services and rental housing services are included in GDP
Which of the following assertions is not correct about the multilateral approach to free trade?
The multilateral approach is simpler than the unilateral approach
In the equation Y = C + I + G + NX
Y represents the economy's total expenditure.
A transfer payment is
a form of government spending that is not made in exchange for a currently produced good or service
.In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing. Food Clothing 2002 price per unit $4 $10 2003 price per unit $6 $20 a. What are the percentage increases in the price of food and in the price of clothing? b. What is the percentage increase in the CPI? c. Do these price changes affect all consumers to the same extent? Explain.
a. The price of food increased by 50 percent ([6-4]/4 x 100). The price of clothing increased by 100 percent ([20-10]/10 x 100). b. In 2002, the market basket cost $300 (4x50 + 10x10); in 2003, it cost $500 (6x50 + 20x10). The percentage increase in the CPI is 66.7 percent ([500-300]/300 x 100). c. Because the price of clothing increased relatively more than the price of food, people who purchase a lot of clothing and little food became worse off relative to people who purchase a lot of food and little clothing.
To compute GDP, we
add up the market values of all final goods and services.
Transfer payments
are payments that flow from government to households. are not made in exchange for currently produced goods or services. alter household income, but they do not reflect the economy's production.
What is the fundamental basis for trade among nations?
comparative advantage
The value of goods added to a firm's inventory in a certain year is treated as
investment, since GDP aims to measure the value of the economy's production that year
In computing GDP, market prices are used to value final goods and services because
market prices reflect the values of goods and services
Suppose an economy's production consists only of corn and soybeans. In 2005, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,
nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.
Suppose an economy produces only cranberries and maple syrup. In 2006, 50 units of cranberries are sold at $20 per unit and 100 units of maple syrup are sold at $8 per unit. In 2005, the base year, the price of cranberries was $10 per unit and the price of maple syrup was $15 per unit. For 2006,
nominal GDP is $1800, real GDP is $2000, and the GDP deflator is 90.
Suppose an economy produces only cheese and fish. In 2008, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2007, the base year, the price of cheese was $10 per unit and the price of fish was $75 per unit. For 2008,
nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5
A recession has traditionally been defined as a period during which
real GDP declines for two consecutive quarters.
A country reported nominal GDP of $200 billion in 2008 and $180 billion in 2007. It also reported a GDP deflator of 125 in 2008 and 105 in 2007. Between 2007 and 2008,
real output fell and the price level rose
The North American Free Trade Agreement
reduced trade restrictions among Canada, Mexico and the United States.
A tax on an imported good is called a
tariff
Suppose a country abandons a no-trade policy in favor of a free-trade policy. If, as a result, the domestic price of beans increases to equal the world price of beans, then
that country becomes an exporter of beans. that country has a comparative advantage in producing beans. at the world price, the quantity of beans supplied in that country exceeds the quantity of beans demanded in that country
Suppose a country abandons a no-trade policy in favor of a free-trade policy. If, as a result, the domestic price of pistachios decreases to equal the world price of pistachios, then
that country becomes an importer of pistachios.
If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price,
the country will be an exporter of the good.
If total spending rises from one year to the next, then which of the following could not be true?
the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices