Ch 12 Alexi Econ

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If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline

Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall.

Why qualify the statement about GDP as a summary statistic by including the phrase​ "or seems​ to"?

As a summary​ statistic, GDP overlooks some areas of production that take place in an economy

An article in the Wall Street Journal states that a change in inventories​ "dragged down the overall growth in GDP by nearly a full percentage​ point" below what it otherwise would have been. For this result to​ occur, is it likely that inventories increased or​ decreased? Briefly explain.

Decreased, since inventories are part of a​ firm's investment, which is a component of​ GDP, inventories must have fallen.

If you were attempting to forecast the level of consumer spending by​ households, which measure of total production or total income might be most helpful in making your​ forecast?

Disposable personal income This is the correct answer.

The purchase of wheatwheat from a wheat farmera wheat farmer by a bakerya bakery. Is not the purchase of a final good 2. The purchase of a new fire trucka new fire truck by the locallocal government. Is the purchase of a final good 3. The purchase of FrenchFrench wine by a U.S.U.S. consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good

FINAL GOOD

GDP is an imperfect measure of economic​ well-being because it fails to measure what types of​ production?

Household production and the underground economy.

Suppose the amount the federal government collects in personal income taxes increases​, while the level of GDP remains the same. What will happen to the values of national​ income, personal​ income, and disposable personal​ income?

National income will remain the same . Personal income will remain the same . Disposable personal income will decrease

An article in the Economist states that​ "the appeal of GDP is that it​ offers, or seems​ to, a summary statistic of how well an economy is​ doing." In what sense does GDP offer a summary statistic of how well an economy is​ doing?

Since GDP measures how much an economy produces during a period of​ time, it may also indicate​ well-being.

Which equation represents the relationship between GDP and the four major expenditure​ components

Y = C + I +G +NX

In the United​ States, the difference between GNP and GDP is smaller than that of many other countries.

smaller

Real GDP is

the value of goods and services evaluated at base year prices.

The Nigerian National Bureau of Statistics accomplished the task of giving these sectors their due weight by

updating the year it used to measure real GDP from 1990 to 2010 and significantly increasing the number of businesses it surveyed.

Ireland is one of the few countries where GDP and GNP differ dramatically. Using GDP per​ person, Ireland has the third highest income per person in Europe. An article on the Financial Times website states​ that: ​"With GDP being about 20 percent larger than​ GNP, Irish people appear​ (when using GDP per​ person) to be richer than what they feel they​ are." Briefly explain the​ author's reasoning.

A significant portion of production in Ireland is by​ foreign-owned firms, which makes the Irish people appear to be richer than they feel they are.

How does real GDP deal with the problem inflation causes with nominal​ GDP?

ALL Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years. B. Real GDP separates price changes from quantity changes. C. By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced

Why in microeconomics can we measure production in terms of​ quantity, but in macroeconomics we measure production in terms of market​ value?

ALL If, in​ macroeconomics, we measured production using​ quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by​ Apple, to gallons of​ milk, and so on. B. When we measure total​ production, we​ can't just add together the quantities of every good and service because the result would be meaningless. C. Measuring production using market value in dollar terms allows us to add together many different goods and services.

Even if GDP included these types of​ production, why would it still be an imperfect measure of economic​ well-being

ALL The value of leisure is not included in GDP. B. GDP is not adjusted for crime or other social problems. C. GDP is not adjusted for pollution and it does not account for unequal income distribution.

​"If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined."

Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined.

Why would we expect firms in the informal sector to be so much smaller than firms in the formal​ sector

Because firms in the informal sector are operating​ illegally, they have less capital than firms operating legally

The figure shows the values of the components of GDP for the year 20162016. Based on the data​ shown, which of the following statements regarding the components of GDP is​ false?

Consumer spending on services is less than the sum of spending on durable and nondurable goods

Which of the following is true about the consumption component of U.S. GDP in​ 2016?

Consumer spending on services was greater than the sum of spending on durable and nondurable goods.

What are the four major components of expenditures in​ GDP?

Consumption, Investment, Government​ Purchases, and Net Exports

What are the four major categories of​ expenditure?

Consumption, investment, government​ purchases, and net exports

Indicate whether you agree or disagree with the following statements. ​"If nominal GDP is less than real​ GDP, then the price level must have fallen during the​ year."

Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP.

Whenever real GDP ​declines, nominal GDP must also​ decline."

Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise.

Indicate whether you agree or disagree with the following​ statement: ​"In years when people buy many shares of​ stock, investment will be high= ​and, therefore, so will gross domestic product ​(GDP

Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and​ inventory, not stock purchases.

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

In the​ U.S., gross domestic product ​( GDP ) and gross national product ​( GNP ) are close in value. Under what circumstances would GNP be much larger than​ GDP?

Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad. Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S.

Why is GDP an imperfect measurement of total production in the​ economy?

GDP does not include household production or production from the underground economy.

When a significant fraction of domestic production takes place in​ foreign-owned facilities, a​ country's difference between GDP and GNP is as​ follows:

GDP will be much larger than GNP.

If Americans still worked​ 60-hour weeks, as they did in​ 1890,

GDP would be much higher than it​ is, but the​ well-being of the typical person would not necessarily be higher

U.S. Gross National Product​ (GNP) differs from U.S. Gross Domestic Product​ (GDP) in which of the following​ ways?

GNP is the value of final goods and services produced by residents of the U.S. GNP considers production that occurs outside the U.S.

How is the GDP deflator​ calculated?

GPD defaltor = Nominal GDP/ Real GDP x 100

How does the size of a​ country's GDP affect the quality of life of the​ country's people?

Generally, the more goods and services people​ have, the better off they are

Suppose the information in the following table is for a simple economy that produces only the following four​ goods: shoes,​ hamburgers, shirts, and cotton. ​ Further, assume that all of the cotton is used to produce shirts.

If the base year is the year​ 2009, then for 2018 equals ​$8460 ​ and the real GDP for 2019 equals ​$8955 ​ b. The​ (annual) growth rate of real GDP in 2019 is 5.85

Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were​ unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spent on household production. Based on these​ findings, what can we predict about total production long dash—whether or not that production is included in the calculation of GDP long dash—in the economy when these workers became​ unemployed?

If the workers had been paying other people to perform the household activities prior to​ unemployment, then total production will fall.

Indicate whether the following statement is correct or incorrect. ​"Corporate profits are much too​ high: Most corporations make profits equal to 50 percent of the price of the products they​ sell."

Incorrect: The largest component of gross domestic income is​ wages, which are about three times as large as profit

What measures besides average number of hours worked and real per capita GDP would you like to have to evaluate the​ well-being of workers in OECD​ countries

Indicators of​ pollution, crime and other social​ problems, and the distribution of income.

According to most​ economists, is it a serious shortcoming of GDP that it does not count household production or production in the underground​ economy?

Most economists would answer​ "no" because these types of production do not affect the most important use of the GDP​ measure, which is to measure changes in total production over short periods of time.

According to data on the usafacts.org​ site, in 2014 the federal government spent​ $850.5 billion on Social Security payments to retired and disabled people. Is this federal government spending considered production as measured by​ GDP? Briefly explain

No, because Social Security payments do not result in the production of new goods and services

Can we conclude anything about the​ well-being of the average German worker versus the​ well-being of the average worker in the United States from these​ data? PICTURE

No, because although the German worker earned less per​ year, they also worked less per year.

Suppose a house is built and sold in the year 2008. If the house is resold in the year​ 2019, is the value of the house included in Gross Domestic Product . ​(GDP) for​ 2019

No. GDP for 2019 includes only production that occurs during 2019.

Nominal GDP The value of final goods and services evaluated at​ current-year prices. Real GDP The value of final goods and services evaluated at​ base-year prices.

Nominal GDP The value of final goods and services evaluated at​ current-year prices. Real GDP The value of final goods and services evaluated at​ base-year prices.

Which of the following is true about the government purchases component of U.S. GDP in​ 2016?

Purchases by state and local governments were greater than purchases by the federal government.

As of​ 2017, 19 countries in Europe have adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Economist​, ​"The euro​ zone's GDP grew at an annualized rate of around​ 2% in the first​ quarter." Is it likely that the article is referring to the growth in nominal GDP or the growth in real​ GDP? Briefly explain.

Real​ GDP, because it shows how the​ economy's overall production of goods and services changes over time.

Suppose that a simple economy produces only the following four goods and​ services: shoes,​ hamburgers, shirts, and cotton. ​ Further, assume that all of the cotton is used in the production of shirts. shoe 125 65 ham 110 3 shirt 60 30 cotton 2,200 .75

The Nominal GDP for the year 2019 is ​$10,255 multiply each qxp then add all

Today, the typical American works fewer than 40 hours per week. In​ 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the​ population's economic​ well-being?

The increase in real GDP per capita between 1890 and today understates​ well-being because the value of leisure is not included in GDP.

According to research by Rafael La Porta of Tuck School of Business at Dartmouth and Andrei Shleifer of Harvard​ University, in developing​ countries, the average firm in the informal​ sector, or underground​ economy, employs 4 workers as opposed to 126 workers employed by the average firm in the formal sector. What is the informal​ sector, or underground​ economy?

The informal sector is the sector of the economy where production is concealed from the government.

What is the difference between the value of a​ firm's final product and the value added by the firm to the final​ product

The value of a​ firm's final product is the sale​ price; value added is the difference between the sale price and the price of intermediate goods.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the​ next

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities.

Which of the following are likely to increase the measured level of GDP and which are likely to reduce​ it?

When the number of people working outside the home decreases​, the measured level of GDP decreases . b. When there is a sharp decrease in the crime​ rate, the measured level of GDP may increase or decrease . c. If higher tax rates cause more people to hide the income they​ earn, the measured GDP decreases

During a discussion with a​ reporter, former Microsoft CEO Steve Ballmer discussed the data compiled on the usafacts.org Web site. Ballmer asked if the reporter knew how many people the government employed and provided the​ answer: "Almost 24 million. Would you have guessed​ that?" Is​ local, state, and federal government spending on salaries and benefits for these employees considered production as measured by​ GDP? Briefly explain.

Yes, because the government purchases component of GDP includes spending on salaries and benefits for government employees

Would the services of a real estate agent who helped sell​ (or helped​ buy) the house be included in GDP for​ 2019?

Yes. GDP for 2019 includes the market value of final goods and services. This includes real estate services.

Is the value of intermediate goods and services LOADING... produced during the year included in Gross Domestic Product LOADING... ​(GDP)? For​ example, is aluminum used to produce a new mountain bike included in​ GDP?

Yes. The value of the aluminum is not directly counted in​ GDP, but the production of aluminum is included in the​ value-added method of measuring GDP.

Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company.

You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption Expenditure b. You purchase a 2013​ (preowned) Ford Escape Hybrid from a friend. Not included in GDP calculation c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. Not included in GDP calculation d. Ford produces​ 1,000 Escapes in a factory in Missouri and ships them to a car dealer in​ Shanghai, China. Net Export Expenditure e. Ford purchases new machine tools to use in its Missouri Escape factory. Investment Expenditure f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant. Government Expenditure

Assuming that inflation has occurred over​ time, what is the relationship between nominal GDP and real GDP in each of the following​ situations?

a. In years after the base​ year, nominal GDP is greater than real GDP. b. In the base​ year, nominal GDP is equal to real GDP. c. In years prior to the base​ year, nominal GDP is less than real GDP.

To calculate personal income from national​ income, which of the following must the BEA​ do?

add government transfer payments

Household production and the underground economy

are not accounted for in the Bureau of Economic​ Analysis' estimates of GDP.

If government cannot accurately measure​ GDP

businesses will not be able to correctly gauge the​ market, and the government will be unable to design efficient tax policies.

An underground economy involves all of the following except

buying and selling of goods and services by obtaining a permit from the government

Which of the following do we subtract from GDP to obtain national​ income?

depreciation

An article in the Economist on the revisions to​ Nigeria's GDP​ commented, "The GDP revision is not mere trickery. It provides a truer picture of​ Nigeria's size by giving due weight to the bits of the​ economy, such as​ telecoms, banking and the Nollywood film​ industry, that have been growing fast in recent​ years." The phrase​ "giving due​ weight" to the sectors of the economy that have been growing quickly means that analysts

developed better measures of those sectors of the​ economy, which then allowed for better GDP estimates.

An article in the Wall Street Journal noted that many economists believe that GDP data for India are unreliable because​ "most enterprises are tiny and​ unregistered, and most workers are employed off the books. The​ government's infrequent surveys represent only a best guess of the value being added in​ back-alley workshops, outdoor markets and other​ cash-based corners of the​ economy." Working​ "off the​ books" refers to

earning income that is not reported for tax purposes.

In the​ circular-flow diagram, who supplies factors of production in exchange for​ income?

households

The more comprehensive approach used to calculate GDP provides a truer picture of the size of​ Nigeria's economy because

it resulted in the initial GDP estimate for 2013 almost doubling in size.

If prices rise over​ time, then real GDP will be

larger than nominal GDP in years before the base year

In an economy with rising​ prices, compared to the base​ year,

nominal GDP is larger than real GDP in years after the base year

Some countries have larger underground economies than do other​ countries, because

of government policies that are retarding economic growth.

Disposable personal income is equal to

personal income minus personal tax payments

If the GDP deflator in 2012 has a value of​ 98.0, then

prices have decreased 2 percent between the base year and 2012

Over​ time, prices may change relative to each other. To take this change into​ account, the Bureau of Economic Analysis calculates

real GDP using chain weights.

In calculating​ GDP, which levels of government spending are included in government​ purchases?

spending by​ federal, state, and local governments

Gross domestic product is best defined as

the market value of all final goods and services produced in a country during a period of​ time, typically one year

An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last​ year, she purchased ​$5,000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for ​$800 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of ​$1,000 each

total value added of the artist is 3000

The difference between the price the firm sells a good for and the price the firm paid other firms for intermediate goods is called

value added

In​ 2016, the largest component of gross domestic income was

wages

An important conclusion to draw from the​ circular-flow diagram is that

we can measure GDP by calculating the total value of expenditures on final goods and​ services, or we can measure GDP by calculating the value of total income.

Briefly explain whether you agree with this definition of GDP.

​Disagree, because GDP measures the value of all final goods and services produced in an​ economy, not all the goods and services produced

What happens if we measure GDP by adding up the value of every good and service produced in the​ economy

GDP is overestimated because of double counting.

Which of the following is not a shortcoming of GDP as a measure of​ well-being?

GDP only counts final goods and services and not intermediate goods

All of the following are correct except Which component of gross domestic income is the​ largest?

Gross domestic income does not include health insurance benefits received by the employees. wages

The table and figure show GDP measured in terms of the total income received by households. Use the table and figure to help determine which of the following statements about the division of income is false.

Gross domestic income is measured precisely

An article in the Wall Street Journal discussed the views of Canadian Minister of Finance Joe Oliver on the effect of falling oil prices on the Canadian economy. According to the​ article, Oliver argued that​ "lower oil prices would have a broadly neutral impact on real ... gross domestic​ product, but have a negative effect on nominal​ GDP." Oliver must be expecting the effect of lower oil prices to

lower the inflation​ rate, which would offset the reduction in nominal GDP.

The problems of small firms working off the books and far from major cities would make it difficult for the Indian government to accurately measure GDP because the

measures of GDP will be understated if these practices are common. Your answer is correct.

Which of the following is included in the​ economist's definition of​ investment

the purchase of new​ machines, factories, or houses


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