Macroeconomics: Unit 3 - Module 5:

Which is an example of an injection into the income stream?

Investment spending by business firms - Injections are additions to the circular flow that represent spending not paid for out of resource income.

What must the government do when it spends more than the revenue it takes in?

Borrow funds in the credit market to cover the deficit - A government that spends more than the revenue it takes in is running a deficit.

The expenditure method of calculating GDP uses what equation?

C + I + G + (X - M) - This is the equation that shows spending by all sectors of the economy.

Why is real GDP a more accurate measure of output than nominal GDP?

Changes in nominal GDP reflect changes in both output and product prices

What is a measure of the real GDP of the value of economic output adjusted for?

Changes in the price level - Nominal GDP is adjusted for changes in the price level to arrive at real GDP.

If personal consumption expenditures equal $10,000, gross private domestic investment equals $2,000, government purchases of goods and services equals $3,000, exports equal $2,200, and imports equal $2,800, then GDP is equal to -$14,400.

Correct! GDP=C+I+G+(X-M)GDP=C+I+G+(X-M).

True or False The value of government expenditure included in GDP does not include transfer payments.

True - Transfer payments are income payments to individuals who provide no goods or services in exchange, such as Social Security or welfare.

Question In national income accounting, what is depreciation?

Wearing out of capital - Over time, capital wears out and must be replaced. The replaced capital adds to GDP, but not to economic growth.

True or False Although GDP is used as a proxy for living standards or economic well-being, there are reasons why GDP is not a perfect prox

true - here are specific reasons why GDP is not a perfect proxy for living standards or economic well-being.

Real GDP is the

value of final output in 1 year after adjusting for inflation for the same year.

How is the growth rate determined?

{(GDPt - GDPt-1)/GDPt-1} ×× 100 - This is the formula for the growth rate of year t.

True or False If the average price of purchased washing machines is higher this year than last year because of an improvement in durability, GDP will not reflect this change in price.

False - GPD accountants are measuring value created, which does not take into account quality, only expenditure.

True or False Consumption expenditure refers to spending on goods, but not services

False Correct! Consumption expenditure includes expenditures on consumer durables, nondurables, and services.

True or False If John uses his savings to purchase stock in a cola company, he is making an investment expenditure as defined in GDP.

False Investment expenditure refers to the purchase of plants and equipment, residential construction, and changes in inventory.

Formula of GDP

GDP = C+I+G+(X-M)

What does leakages out of the income stream include?

Savings, taxes and imports - These three items take money away from spending in the country. Savings and taxes are returned to the economy through investments and government spending

True or false. Comparing the GDP across countries is complicated because each country uses its own currency.

True - Each country uses its own currency to measure the GDP, and because exchange rates often fluctuate, it is difficult to compare the GDP among countries.

True or False Government takes funds out of the stream by taxing households and by borrowing in the credit market.

True - Government taxes and borrowing are leakages from the income flow.

True or False If Emily puts her son into the local day care, GDP increases. If she stays home and cares for her son, GDP does not increase.

True - If Emily pays a childcare provider, this is considered a market transaction and is counted in GDP. If Emily cares for her son herself, this is a nonmarket transaction and is not counted in GDP.

True or False Lower unemployment is a benefit of economic growth.

True - With higher output firms tend to employ more workers, creating more employment.

Which statement about production activities that are not included in the GDP is true?

Provide investment and expanded production in informal sectors.

Lower government borrowing is a benefit of economic growth.

Economic growth creates higher tax revenues, and there is less need to spend money on benefits such as unemployment.

Which of the following activities is counted as part of GDP?

A baker selling cookies at his store - The sale of cookies is counted in GDP as the sale is not hidden, and the baker is not making the cookies for him/herself.

Which of the following is a cost of economic growth?

An increase in pollution - Increased economic growth can lead to increased pollution as production increases.

With economic growth, decreases, and nflation increases.

As economies grow, more businesses open and provide more employment and less unemployment. - With economic growth, income increases along with the demand for more spending, so the price rises.

Gross Domestic Product (GDP)

GDP is the market value of all final goods and services produced within a country in a year.

What is the amount of leakage from the income stream in Macroland's economy?

Leakages are savings, taxes, and imports.

True or False A negative value for net exports causes GDP to increase.

False - GDP=C+I+G+(X-M)GDP=C+I+G+(X-M), so GDP falls if net exports (X−M)X-M is negative.

True or False Otherland has a real GDP of $9.320 million compared to Macroland's real GDP of $8.214 million. Otherland has a higher standard of living than Macroland.

False - ! The real GDP is not a good comparison because the countries could be very different sizes. You would compare GDP per capita to compare standards of living between countries.

True or False If China's GDP is growing at a faster rate than Canada's, people living in China are better off than people living in Canada.

False - Correct! There are many reasons why GDP growth may not exactly coincide with individual well-being, including income distribution and economic bads.

True or False Both exports and imports are added when calculating GDP.

False - The calculation for GDP adds exports and subtracts imports.

True or false. There is more injection in a circular flow model if there are more imports than exports.

False - With more imports, more will be paid out of the economy and, therefore, there is more leakage than injection.

True or false. Construction income of undocumented workers is accounted for in the GDP.

False -. The Department of Labor and the IRS have no record of undocumented workers, so it is difficult for GDP accountants to track these payments.

Which of the following is not included in the Expenditure approach to GDP?

Financial institutions - Financial institutions are involved in the income side of the GDP.

In the production process of the national output, firms demand factors of production and households supply factors of production.

Firms efficiently combine these factors of production to produce goods and services. - Households supply factors of production in an exchange for income in the form of wages, interest, rent, and profit.

What does gross private domestic investment include?

Fixed investment (plants and equipment), residential construction, and changes in inventory - Investment occurs when someone starts a new business or grows an existing business. Investment activities include building factories or stores, purchasing equipment, and adding inventory. Residential construction is also counted as an investment.

What is true if GDP rises at the expense of leisure time?

GDP may be overstating the increase in well-being - Although there is more output, the reduction in leisure time causes the quality of life to fall.

Which is the correct formula for GDP?

GDP=C+I+G+(X−M) - Adding consumption spending by households (CC), investment spending by business (II), purchases of goods and services by government (GG), and spending by the foreign sector, or net exports (X−M)(X-M), gives this formula for GDP.

Which of the following are benefits of economic growth?

Higher income - This enables consumers to enjoy more goods and services, as well as better standards of living.

Everything that is purchased in a year must be purchased by which group(s)?

Households, business, firms, the government, or foreign entities - The sum of spending by the four buying sectors is GDP.

What is true about consumption expenditures?

They are based on consumers' disposable income - Disposable income is the amount of income that consumers have available to spend on goods and services.

What is an example of a noneconomic condition that would increase GDP but not the standard of living?

Leading to a large increase in the production of healthcare products to prevent the SARS virus due to the outbreak - The production of preventive healthcare products would increase GDP. Citizens would be better off if there was no virus and the resources used to produce these healthcare products could be used to produce something else.

What is Macroland's GDP per capita in year 2151?

Macroland's GDP per capita is $23,000. This is calculated by dividing GDP by population.

Which is an example of a leakage from the income stream?

Purchases of imported goods - Leakages occur when income is received but not spent directly on purchases from domestic firms

Purchases from foreign firms are imports , whereas goods and services sold to foreign buyers are exports .

Purchases of imports are flows out of the stream (leakages). - Exports are injections into the income stream.

When outputs are preferred more to less, they are economic goods, and when these goods and services are preferred less to more, they are economic bads.

They are preferred more because they have a positive marginal utility, so their increased consumption increases the GDP. - They are preferred less because they have a negative marginal utility, so their decreased consumption decreases the GDP.

The income earned by resources is called NI and consists of wages, rent, interest, profit, and proprietors' net income. The total market value of all final products produced within a country during a given time period is GDP .

This includes depreciation and is equivalent to the payments to resources which produced the final products. - GDP is output produced on U.S. soil and includes production by foreign-owned businesses and foreign workers.

True or False Comparing current GDP with last year's GDP provides more accuracy for a year-on-year comparison than comparing current GDP with GDP 20 years ago.

True - Many changes have occurred over the past 20 years, such as the introduction of new products. These changes are not always reflected in GDP estimates.

True or False In the process of producing GDP, income is generated.

True - NI consists of wages, rent, interest, profit, and proprietors' net income; business owners deduct wages and other expenses from revenue and the amount that is left becomes profit or income to the proprietor (owner) of the business.

True or False In the process of producing GDP, income is generated.

True - National Income (NI) consists of wages, rent, interest, profit, and proprietors' net income; business owners deduct wages and other expenses from revenue and the amount that is left becomes profit or income to the proprietor (owner) of the business.

True or False Noneconomic conditions can affect the economy both positively and negatively.

True - Noneconomic conditions in the country can have both negative and positive effects on GDP.

True or False A higher price level causes an increase in nominal GDP but not an increase in real GDP.

True - When real GDP is calculated, the increase in the price level is removed.

True or false. With economic growth, labor productivity will be improved.

True - With economic growth, new technology will be introduced to improve the productive efficiency of labor and capital.