Chapter 10: GDP

If GDP included goods that are resold, it would be a more accurate measure of economic well-being. True False

False

National Income Account Identity

Y = C + I + G + NX

Economic growth refers to____

changes in REAL GDP over time

Which of the following would be excluded from 2019 GDP? The sale of a. a 2019 Honda made in Tennessee. b. a haircut. c. a realtor's services. d. a home built in 2018 and first sold in 2019. e. All of the above should be counted in 2019 GDP.

d. a home built in 2018 and first sold in 2019.

national accounts

set of rules and definitions used to measure aggregate economic activity of a nation

GDP (Gross Domestic Product)

the market value of all final goods and services produced within a country given a period of time

Nominal GDP

value if all G&S produced using CURRENT year prices - 2 reasons it can rise: 1. the economy is producing a larger amount of G&S 2. G&P are selling for higher prices -> sign if inflation

If nominal GDP in 2019 exceeds nominal GDP in 2018, then the production of output must have a. fallen. b. stayed the same. c. risen. d. risen or fallen because there is not enough information to determine what happened to real output.

d. risen or fallen because there is not enough information to determine what happened to real output.

Gross domestic product is the sum of the market value of the a. normal goods and services. b. final goods and services. c. inferior goods and services. d. intermediate goods. e. manufactured goods.

b. final goods and services.

If your grandparents buy a new retirement home, this transaction would affect a. consumption. b. investment. c. government purchases. d. net exports. e. none of the above.

b. investment.

After graduation, an American college student moves to Japan to teach English. Her salary is included a. only in U.S. GDP. b. only in Japan's GDP. c. in both U.S. GDP and Japan's GDP. d. in neither U.S. GDP nor Japan's GDP.

b. only in Japan's GDP.

U.S. gross domestic product (in contrast to gross national product) measures the production and income of a. Americans and their factories no matter where they are located in the world. b. people and factories located within the borders of the United States. c. the domestic service sector only. d. the domestic manufacturing sector only. e. none of the above.

b. people and factories located within the borders of the United States.

An example of a transfer payment is a. rent. b. unemployment benefits. c. profit. d. government purchases. e. wages.

b. unemployment benefits.

Sam bakes a cake and sells it to Carla for $10. Woody pays Diane $30 to tutor him. In this economy, GDP is a. $10. b. $30. c. $40. d. $20.

c. $40.

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here? a. $60 b. $100 c. $80 d. $40

c. $80 because wool is intermediate goods

Real GDP is measured in ______ prices while nominal GDP is measured in ______ prices. a. intermediate; final b. current year; base year c. domestic; foreign d. base year; current year e. foreign; domestic

d. base year; current year

Gross domestic product can be measured as the sum of a. investment, wages, profits, and intermediate production. b. net national product, gross national product, and disposable personal income. c. final goods and services, intermediate goods, transfer payments, and rent. d. consumption, investment, government purchases, and net exports. e. consumption, transfer payments, wages, and profits.

d. consumption, investment, government purchases, and net exports.

... goods and services...

GDP includes both tangible and intangible goods tangible: food, clothes, airplanes intangible: services like haircuts doc visit, travel

... final..

GDP includes only final goods - Final goods: intended for end user - intermediate good: ingredient or component used in production of another good

GDP is the market value..

GDP is calculated a market value (using market prices) since it's difficult to add together different items

GDP deflator

a measure of the price level calculated as the ratio of nominal GDP to real GDP = (Nom. GDP / Real GDP )* 100 Notice: -Both GDP have to be in the SAME year - deflator will always equal to 100 for base year

Rent in GDP

- For renters -> rent is included in GDP ( a market value) - For owners -> govt estimates RENTAL VALUE, include that in GDP (an imputed value) -> added to GPD as her expenditure and income NOTICE: this imputation is necessary in order for GDP to be invariant when housing units shift between tenant occupied and owner occupied

When are G&S not included in GDP

- household productions (cleaning, cooking, yard work, etc) - G&S sold at black market (underground economy) - intermediate goods - used goods - financial assets : stocks and bonds - foreign produced G&S - value of clean air and water

Consumption (C)

-> the biggest component of GDP : value of all G&S bought by households. Including 3 subcomponents: 1. Durable goods ex: automobiles, 2. Non durable goods ex: food, clothing 3. Services ex: education

GDP measures multiple things at once

1. total market value of all G&S produced 2. Total spending on all G&S produced Note: Total production = total spending bc if good not sold, it's included in inventory/ considered purchased by firm 3. total income of everyone in the economy Note: based on "national accounts" every dollars of revenue must either go to some worker or be retained by firm. - total revenue must equal total income received by workers and firms (Revenue= Income)

Net Exports (NX)

= exports - imports exports: spending on domestically produced G&P by foreigners imports: spending on foreign produced G&S by domestic residents (negative because it is bought by consumers, firms, or govt and are included in C, I, or G respectively )=> must subtract value of imports -> they are excluded from total

..of all...

GDP includes all goods and services, except for: 1. G&S sold at black markets 2. G&S produced at home (household productions)

Dell sells a desktop computer from its inventory to the Johnson family.

C and I when a good is taken out of inventory, investment is negatively affected and positively affect consumption

...within a country...

GDP includes all production that occurs within the geographical boundaries of a particular country (whether by our citizens or foreigners)

Graincorp, a U.S. agricultural company, produces corn syrup at a plant in Iowa on September 16, 2019. It sells the corn syrup to Crunchy's for use in the production of cereal that will be made in the United States in 2019. (Note: Focus exclusively on whether production of the corn syrup increases GDP directly, and ignore the effect of production of the cereal on GDP.)

Excluded from US GDP Because Crunchy's uses the corn syrup that Graincorp produces in the production of cereal, the corn syrup is considered an intermediate good, not a final good and, therefore does not directly increase the GDP of the United States. However, the price of the cereal will include the value of the corn syrup. Therefore, the market value of the corn syrup will enter GDP as part of the market value of the final good, the cereal.

Roadway Motors, a U.S. automobile company, produces a convertible at a plant in Germany on March 10, 2020. Roadway Motors imports the convertible into the United States on May 20, 2020.

Excluded from the US GDP Roadway Motors is a U.S. company, but because it produces the convertible in Germany, the output will be part of the GDP of Germany, not the GDP of the United States.

Identity of GDP

GDP = Total production = total expenditure/ spending = total = total income

... in a given period of time...

GDP measures production that occurs over specific interval of time, usually year or quarter (3 months) - Growth in GDP is usually expressed with annual rate Note: annualized growth = quarterly growth *4 ex: in Q1 of 2014, the US economy grew by 1% -> then annualized rate was 4% - GDP data is usually seasonally adjusted

Investment (I)

Spending on new capital equipment, inventories, and structures, including new housing Notice: means purchases of capital, NOT stocks, bonds 3 subcomponents: 1. Nonresident Inv. = spending on capital 2. Residential Inv.= spending on new houses 3. Inventory Inv. = change in value of all firms' inventories Note: like using income to generate assets -> house, car for car rental company, computer for office (different from normal consumption)

How is your purchase of a $40,000 BMW automobile that was produced entirely in Germany recorded in the U.S. GDP accounts? a. Consumption increases by $40,000 and net exports decrease by $40,000. b. Investment increases by $40,000 and net exports increase by $40,000. c. Net exports decrease by $40,000. d. Net exports increase by $40,000. e. There is no impact because this transaction does not involve domestic production.

a. Consumption increases by $40,000 and net exports decrease by $40,000.

Which is the largest component of GDP? a. consumption b. government purchases c. investment d. net exports

a. consumption

If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500 worth of shoes to consumers, the contribution to GDP is a. $600. b. $500. c. $50. d. $100. e. $650.

b. $500.

The value of plant and equipment worn out in the process of manufacturing goods and services is measured by a. consumption. b. depreciation. c. investment. d. intermediate production. e. Net national product.

b. depreciation.

Which of the following does NOT add to U.S. GDP? a. General Motors builds a new auto factory in North Carolina. b. Boeing manufactures and sells a plane to Air France. c. The federal government sends a Social Security check to your grandmother. d. The city of New York pays a salary to a policeman.

c. The federal government sends a Social Security check to your grandmother.

GDP would include which of the following? a. illegal drug sales b. the value of taking a day off from work c. consulting services d. housework e. intermediate sales

c. consulting services

U.S. GDP would exclude which of the following? a. the purchase of a new Mazda produced in Illinois b. lawyer services purchased by a home buyer c. cotton purchased by Lee Jeans d. a new bridge purchased by the state of Texas e. lawn care services purchased by a homeowner

c. cotton purchased by Lee Jeans -> intermediate goods

An economy's gross domestic product is a. total income times total spending. b. the excess of spending over income. c. total income and total spending. d. the excess of income over spending.

c. total income and total spending.

Question WorkspaceCheck My WorkAn American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? a. Net exports and GDP both rise. b. Net exports do not change, while GDP rises. c. Net exports and GDP both fall. d. Net exports fall, while GDP does not change.

d. Net exports fall, while GDP does not change. consumption rises, and imports fall -> unchanged

Question Workspace Check My Work If all quantities produced rise by 5 percent and all prices fall by 5 percent, which of the following best describes what occurs? a. Real GDP is unchanged, while nominal GDP falls by 5 percent. b. Real GDP is unchanged, while nominal GDP rises by 5 percent. c. Real GDP rises by 5 percent, while nominal GDP falls by 5 percent. d. Real GDP rises by 5 percent, while nominal GDP is unchanged.

d. Real GDP rises by 5 percent, while nominal GDP is unchanged.

... produced...

goods are included in GDP only in the year in which they were produced a . used goods: that are resold are NOT included in GDP b. unsold goods: are included in GDP and counted as "inventory investment"

Felix buys a new set of tools to use in his plumbing business.

investment -> income-generating assets

Government Spending(G)

spending on G&S by all levels of govt-local, state, federal, excluding transfer payment *transfer payment: money given to citizens by govt / payment not made in exchange for G&S (because nothing is produced here) ex: welfare medicare, foodstamps, UI

Real GDP

value of all G&S produced using priced from a selected base year (G&P valued at CONSTANT price) -> adjusted for inflation -> can ONLY rise if the economy is producing larger amount of G&S => preferable since it is not affected by inflation -> when economists study GDP they want to know if output change, but nominal GDP can be affected by both price and output