9th Edition ECONOMICS FOR TODAY Chapter 15 Gross Domestic Product

Nonproductive Financial Transactions

- GDP does not count purely private or public financial transactions, such as giving private gifts, buying and selling stocks and bonds, and making transfer payments. - Nonproductive transactions such as: welfare, social security, veteran's benefits, and unemployment benefits (transfer payments) do not represent production of any new or current output. - Transfer payments arevmade to people that are entitled to them. - Stock market transactions are exchanges of certificates of ownership or indebtness and not actual new production.

Second Transactions

- GDP includes only current transactions. - Such transactions as a used car or home built some years ago do not count. They are merely exchanges of previously produced goods and are NOT CURRENT PRODUCTIONS of new goods that add to the existing stock of cars and homes. - The sales commission on a used car or a home produced in another GDP period counts in current GDP because the salespetson performed a service during the present period of time.

Circular Flow Model

A diagram showing the exchange of money, productsb and resources between households and businesses.

Transfer Payment

A government payment to inviduals not in exchange for goods or services currently produced.

Stock

A quantity measured at one point in time . For example, an inventory of goods or the amount of money in a checking account.

Flow

A rate of change in a quantity during time period, such as dollarsper year. For example income and consumption are flows that occur per week, per month, or per year.

Which of the following would be included in the government expenditures component of GDP?

Construction costs of a new public school building.

All changes in nominal GDP are due to price changes.

False

Final Goods

Finished goods and services produced for the ultimate user.

Intermediate Goods

Goods and services used as inputs for the production of final goods. (Example: Glass sold by wholesale to an automaker transactions are not included in GDP. The glass is the in-between good used in the production of cars. When the car is sold the glass in included in the final car's selling price, which is the value of the final good counted in GDP.)

Which of the following correctly gives us national income (NI)?

Gross domestic product minus depreciation.

Which of the following is included in personal income but not in national income?

Social Security payments

Gross Domestic Product (GDP)

The market value of all final goods and services producef in a nation during a period of time, usually a year.

Expenditure Approach

The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.

Which of the following would be classified as a personal consumption expenditure?

Your purchase of this economics course.

The lower portion of the circular flow model contains factor markets in which households provide: a. output of all final goods and services produced. b. savings, spending, and investment. c. labor, money, and machines. d. none of these.

d

GDP does count: a. state and local government purchases b. spending for new homes c. changes in inventories d. none of these

d.

In the circular flow model, who is a seller in the factor markets and a buyer in the product markets?

households

National income is calculated as GDP:

minus depreciation.

The expenditure approach to GDP accounting includes:

net exports.

Nominal gross domestic product is based on:

the existing prices at which final goods and services are actually sold.

The GDP chain price index is designed to adjust nominal GDP for changes in:

the general level of prices over time.

Real GDP means GDP:

valued at prices in a base year

More than 70 percent of national income can be attributed to:

compensation of employees

Using the income approach, indirect business taxes have to be added to get gross domestic product because the:

selling price of a product includes these taxes, which are income to the government representing the public interest of households.

To get personal income from national income, one must:

subtract corporate profits and Social Security taxes, and add in transfer payments and other income.

In Exhibit 5-10, using the expenditure approach, compute business investment spending (I). Which of the following is correct?

$1,000 billion

In Exhibit 5-9, personal disposable personal income (DI) equals:

$2,391

In Exhibit 5-11, and using the expenditures approach, gross domestic product (GDP) equals:

$7,010 billion.

In an economy with persistent inflation,

nominal GDP will grow faster than real GDP.

Gross domestic product that is based on existing prices is called:

nominal, current, and money GDP.

Increased production, but not increased inflation, will result in higher:

real GDP.