Midterm 2 Chapter 8
The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because
- spending by one group is income to another. - profit is defined as what is left over from total business receipts after all other costslong dashwages, rents, interestlong dashhave been paid.
Total income can be viewed as the sum of
- the dollar value of output produced since total income and total production are equal. - wages, rents, interest, and profits. - payments to factor services such as land, labor, capital, and entrepreneurial activity.
According to the circular flow of income and output, which of the following is not true? A. In every economic transaction, the seller receives exactly the same amount that the buyer spends. B. Total income and total output must be equal. C. Goods, services and money all flow in one direction since money pays for the goods and services. D. Goods and services flow in one direction and money payments flow in the other direction.
C. Goods, services and money all flow in one direction since money pays for the goods and services.
FORMULAS GDP = C + netI + G + X + depreciation NDP = C + I + G + X - depreciation GDP - depreciation = NDP
CORRECT
A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge. As a result of this, GDP ________
Decreases
Mr. King performs the service of painting his own house instead of paying someone else to do it. This activity is _____ in GDP.
Excluded
Mr. Langham sells a used laptop computer to his neighbor. This activity is ______ in GDP.
Excluded
Mrs. Ho receives a Social Security payment. This activity is _________ in GDP.
Excluded
Mrs. King takes photos of planets and stars as part of her astronomy hobby. This activity is _______ in GDP.
Excluded
GDP counts intermediate goods because to not do so would result in GDP being undervalued.
FALSE
Personal income is the income received by households after personal income taxes are paid.
FALSE
The dollar value of total output is equal to the total monetary value of all _______ goods and services produced.
Final
What is correct about GDP
GDP excludes nonmarket production and is not a measure of a nation's overall welfare.
What is true about the use of GDP as a measure of national welfare
GDP is a useful measure of national welfare since it excludes nonmarket transactions.
______ is the total market value of final goods and services produced in an economy during a one-year period by factors of production within the nation's borders. It represents the dollar value of the flow of final production over a one-year period.
Gross domestic product
Mr. Ho spends $10,000 on shares of stock via an Internet trade order. This activity is excluded in GDP. Mr. Ho pays a $10 brokerage fee. This activity is _________ in GDP.
Included
Mr. King paints houses for a living. This activity is _____ in GDP.
Included
Mrs. King earns income from parents by taking baby photos in her home photography studio. This activity is _______ in GDP.
Included
Ms. Chavez makes a $300 payment for an Internet-based course on stock trading. This activity is ______ in GDP.
Included
E*Trade charges fees to process Internet orders for stock trades. This activity is ______ in GDP.
Included
To obtain disposable personal income, we subtract all personal ______ benefits from personal income. Disposable personal income is income that individuals actually have for consumption or saving.
Income Taxes
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.Real GDP is computed by adjusting nominal GDP for
The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ______
PROFIT
Disposable personal income is personal income after personal income taxes have been paid.
TRUE
For a business, profit is a cost of production.
TRUE
Gross domestic income (GDI) is identical to gross domestic product (GDP).
TRUE
In the circular flow model of income and output, households sell FACTOR services to businesses that pay for those services. The receipt of payments is total INCOME. Businesses sell goods and services to households that pay for them.
TRUE
National income is income earned by all U.S. factors of production.
TRUE
The dollar value of total output is always equal to total income.
TRUE
To go from personal income to disposable personal income, personal income taxes must be subtracted.
TRUE
Total income is the annual cost of producing the entire output of final goods and services.
TRUE
The year at which the plots of nominal GDP and real GDP cross is the BASE year. At this crossing point, nominal GDP is EQUAL TO real GDP and the price index for that year is 100
This fact means that at this crossing point, the flow of goods and services are valued in current-year prices that are THE SAME AS base-year prices
The expenditure approach to tabulating GDP
adds up the total amount spent on newly produced domestic goods and services during the year.
If a household purchases a new car and a new refrigerator, this would be classified as spending on
consumer durables
In product markets,
consumer goods and services flow to households and money flows to businesses.
The biggest component of GDP using the expenditure approach is ____________ and the biggest component of GDP using the income approach is _____________.
consumer expenditures; wages
To derive GDP using the expenditure approach, which of the following components are added together?
consumption expenditures, gross private domestic investment, government expenditures, and net exports
The U.S. government spends considerably less on antipollution efforts this year than it did in recent years. As a result of this, GDP ____
decreases
The quality of cancer treatments increases, so patients undergo fewer treatments, which hospitals continue to provide at the same price per treatment as before. As a result of this GDP _____
decreases
Suppose social security contributions rise by $1 billion while social security benefits also rise by $1 billion. Further, personal income taxes fall by $500 million. As a result,
disposable income should increase while personal income and national income are unchanged.
In measuring GDP, we must _____ (1) purely financial transactions, such as the buying and selling of securities; (2) government transfer payments and private transfer payments; and (3) the transfer of secondhand goods.
exclude
Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GPA? - The manufacturer purchases a chip in June. - Then the manufacturer uses it as a component in a computer in August. - Finally, the company sells the computer to a customer in November.
excluded excluded included
The _____ approach to measuring GDP requires that we add up consumption expenditures, gross private investment, government purchases, and net exports. Consumption expenditures include consumer durables, consumer nondurables, and services
expenditure
In the circular flow of income
households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms.
A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider. This activity is ______ in GDP
included
A retail outlet of the company sells a computer manufactured during the current year. This activity is _____ in GDP
included
To get an accurate measure of GDP using the income approach, we must also add __________ and ________ to those total factor payments.
indirect business taxes; depreciation
GDP is a useful measure for tracking changes in the _________ of overall economic activity over time, but it is not a measure of the well-being of a nation's residents because it fails to account for nonmarket transactions, the amount and quality of leisure time, environmental or safety issues, labor market discrimination, and other factors that influence general welfare.
market value
To obtain ________ income, we subtract indirect business taxes and transfers from net domestic product and add other business income adjustments and net U.S. income earned abroad.
national
A transaction that is included in GDP
paying your dentist to have your teeth cleaned.
To obtain _______ income, we must add government transfer payments, such as Social Security benefits and food stamps. We must subtract income earned but not received by factor owners, such as corporate retained earnings, Social Security contributions, and corporate income taxes.
personal
The largest component of GDP by far is
personal consumption expenditures.
An increase in social security benefits will make
personal income larger.
An increase in corporate income taxes would reduce
personal income.
The income households actually receive before they pay personal income taxes is
personal income.
Air quality improves significantly throughout the United States, but there are no effects on aggregate production or on market prices of final goods and services. As a result of this, GDP ______
remains the same
A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale. As a result of this, GDP _______
remains unchanged
A tennis player wins two top professional tournaments as an unpaid amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of this, GDP ______
remains unchanged
To derive GDP using the income approach, we add up all factor payments, including wages, profit, interest, and _____
rent
Total income equals the dollar value of total output because
spending by one group represents income to the other group.
Gross domestic product is defined as
the total market value of all final goods and services produced in an economy during a year.
Gross output is
the total market value of all goods and services produced during a year by factors of production located within a nation's borders, including all forms of business-to-business expenditures and thereby double counting business spending across all stages of production.
To avoid double counting, we look only at final goods and services produced or, equivalently, at
value added
What is used to calculate gross domestic income (GDI)?
wages + interest + rent + profit + indirect business taxes + depreciation = GDI
