Assessment: Measuring Output (GDP)

Determine the effect of the following transaction on GDP in the United States in 2017. b. Coffee, Inc. opens a new location and purchases $10,000 in used equipment. GDP remained unchanged.

Explanation b. Since the firm purchased used equipment, GDP remained unchanged.

Which of the following correctly describes GDP using the income approach? GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income

Explanation Because expenditures on goods and services have to equal the amount of income generated, GDP can also be found from the income approach. Using the income approach, we start with national income. National income adds up all of the wages, rents, interest, and profits and losses earned from our resources. Once we have national income, we add back in other sources of value that are taken out of our income or our international accounts. These are indirect business taxes, depreciation, and net foreign factor income. Therefore, from the income approach, GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income.

Determine whether the transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. b. Sam purchases shares of Apple stock. Not included in GDP.

Explanation b. This is a financial transaction, so it is not included in GDP.

Which of the following expenditures is an example of a consumer durable good? Arti buys a new refrigerator from Sears.

Explanation Consumption expenditures are purchases of new goods and services by households. Consumption expenditures are broken into three categories: durable goods, nondurable goods, and services. Durable goods are goods that have an average useful life of three years or more. In this example, only the refrigerator would be expected to last at least three years, so it is considered a durable good. The manicure is a service, while the coffee, donut, and soccer cleats are nondurable goods.

Henry and his girlfriend ate dinner at the new Thai restaurant that recently opened in his neighborhood. This expenditure would be included in: Services

Explanation Consumption expenditures are purchases of new goods and services by households. Consumption expenditures are broken into three categories: durable goods, nondurable goods, and services. Services are the direct output of another person and are often intangible. Restaurant meals fall under the category of service.

Although GDP is likely the best measure of economic activity in the economy, one reason why GDP is considered to be an imperfect measure is because: GDP does not include the purchase of illegal goods.

Explanation GDP, or gross domestic product, tells us the value of final goods and services produced in an economy. Although GDP is likely the best measure of a country's economic activity, it is not a perfect measure. Goods and services that are not bought and sold in a formal market are not included in GDP. Also, GDP does not capture activities in the underground economy. Those activities in the underground economy are illegal and/or unreported.

The major difference between nominal GDP and real GDP is: nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices. Correct

Explanation Nominal GDP is the value of goods and services (output) produced in an economy measured at current prices. Real GDP is the value of goods and services (output) produced in an economy measured using constant prices.

Nominal gross domestic product is the: dollar value of all final goods and services that are produced during a fixed period of time.

Explanation Nominal gross domestic product (GDP) is the dollar value of all final goods and services that are produced during a fixed period of time. GDP measures the quantities produced valued at current-year prices.

The equation for net investment is written as: Net Investment = Gross Investment - Depreciation

Explanation While gross investment tells us how much was spent on investment in a fixed amount of time, net investment tells us the additional amount of investment that was added to the economy. Because some of the capital in the economy wears out, is used up, or becomes obsolete, some investment simply acts as a replacement and does not add any additional amount to the economy. Therefore, to find net investment, we subtract out depreciation (worn out or used up capital) from the amount of gross investment. Thus, Net Investment = Gross Investment - Depreciation.

Determine whether the following example would be included in Gross Domestic Product (GDP). a. When Judy went to the grocery store yesterday, she bought three pounds of potatoes. Judy's purchase of potatoes would be included in GDP as consumption expenditure.

Explanation a. Because Judy is purchasing a newly produced final good and she is purchasing it for consumption, the transaction is included in GDP. Judy is an individual consumer; therefore, her purchase is recorded in the consumption expenditures portion of GDP.

Determine the effect of the following transaction on GDP in the United States in 2017. a. Washing, Inc. produces washing machines in the United States. In 2017, it produced $250,000 worth of washing machines, but consumers only purchased $150,000 worth. Consumption expenditures increased by $150,000 and investment increased by $100,000.

Explanation a. Consumption expenditures increased by $150,000, representing the amount that consumers purchased. The remaining output is in inventory, so investment increased by $100,000.

Each scenario includes two transactions. Determine whether these transactions will increase GDP. a. Sean grows vegetables in his garden to make salads for his family. Mike purchases vegetables at a local farmers' market to make salads for his family. Mike's transaction is included in GDP. b. Sam volunteers at the local library tutoring students in math. Laura tutors students in math, but instead of receiving money, parents often make her meals or give her small gifts. Neither Sam nor Laura's transaction is included in GDP. c. Neil sells illegal drugs. Morgan creates copies of music downloads and sells them. Neither Neil nor Morgan's transaction is included in GDP.

Explanation a. Since Sean grows vegetables in his own garden, it is not included in GDP. This is a nonmarket transaction. It has no market value, so it is not included in GDP. Mike's transaction does have a market value, so it is included in GDP. b. Neither Sam nor Laura's transaction is included in GDP. Neither transaction involves an exchange of currency; therefore, they have no market value. They will not increase GDP. c. Neither Neil nor Morgan's transaction is included in GDP. Both are considered illegal activity in the underground economy; therefore, they are not included in GDP.

Determine whether the transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. a. The city government purchases new playground equipment for the park. Included in GDP under government expenditures.

Explanation a. This is a purchase made by the government, so it is included in GDP under government expenditures.

a. Using the income approach, GDP is measured by the value of: all final goods and services in an economy using the income they generate. b. The income approach is: equal to the expenditures approach. c. Payments for entrepreneurial ability include income earned: by individual proprietors and corporate profits

Explanation a. Using the income approach, GDP is measured by the value of all final goods and services in an economy using the income they generate. b. The income approach is equal to the expenditures approach. Every dollar of expenditure on final goods and services is a dollar of income for owners of land, labor, capital, and entrepreneurial ability. c. Payments for entrepreneurial ability include income earned by individual proprietors and corporate profits.

Determine whether the following example would be included in Gross Domestic Product (GDP). b. Ford Motor Company buys four tires to put on a new Ford Mustang. The purchase of the tires would not be included in GDP.

Explanation b. Because Ford is using the tires to make a final good, the tires are considered an intermediate good and would not be included in GDP.

Determine the effect of the following transaction on GDP in the United States in 2017. c. Andy purchases $20 of coffee roasted and bagged in Colombia during 2017. Consumption expenditures increased by $20 and net exports decreased by $20.

Explanation c. Andy is a consumer purchasing a good, so consumption expenditures increased by $20. Since the product was an import, net exports decreased by $20.

Determine whether the transaction below would be included in GDP and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. c. The Smith family purchases a new boat. Included in GDP under consumption expenditures.

Explanation c. This is a purchase made by a household, so it is included in GDP under consumption expenditures.

Determine whether the following example would be included in Gross Domestic Product (GDP). c. The U.S. Air Force purchases two new fighter jets from Boeing. The purchase of the two fighter jets would be included in GDP as a government purchase.

Explanation c. When the government—in this case, the U.S. Air Force—purchases a final good to use, it is included in GDP. Because the government is making the purchase, the fighter jets would be recorded in the government purchases portion of GDP.

Determine the effect of the following transaction on GDP in the United States in 2017. d. The Jackson family hires Home Construction, Co. to build their new house in 2017. The total cost of the house was $175,000. Investment increased by $175,000.

Explanation d. Investment increased by $175,000, since new home builds are considered residential investment.

Determine whether the following example would be included in Gross Domestic Product (GDP). d. When Joey had his birthday last week, his grandmother sent him a $100 bill that he could spend. Joey's birthday gift of $100 would not be included in GDP.

Explanation d. The gift Joey receives is just a transfer of income from one person to another and is not a purchase of a newly produced good or service. Therefore, the $100 would not be included in GDP.

Determine whether the transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. d. Design, Inc. purchases four of the latest-model laptops to be used in its web design business. Included in GDP under gross investment.

Explanation d. This is a purchase made by a firm, so it is included in GDP under gross investment.