Chapter 12, GDP
The difference between the price the firm sells a good for and the price the firm paid other firms for intermediate good is called
value added
Final Good or Service
A good or service purchased by a final user
Intermediate good or service
A good or service that is an input into another good or service, such as a tire on a truck
What is an example of a final good or service?
A hamburger purchased by a consumer and a computer purchased by a business
Net Exports
Exports minus imports, exports are goods and services produced in the United States and purchased by foreign forms, households, and governments
For how long is GDP included in production?
GDP includes only production that takes place during the indicated time period
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
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
In the circular-flow diagram, who supplies factors of production in exchange for income?
Households
Value Added
The market value a firm adds to a product, refers to the additional market value gives to a product and is equal to the difference between the price for which the form sells a good
Gross Domestic Product
The market value of all final goods and services produced in a country during a period of time, typically one year
Inflation Rate
The percentage increase in the price level from one year to the next
Expansion
The period of a business cycle during which total production and total employment are decreasing
Which of the following is included in the economist's definition of investment?
The purchase of new machines, factories, or houses
Microeconomic
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices
Macroeconomic
The study of the economy as a whole, including topics such as inflation, unemployment, and the economic growth
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
Are transfer payments included in GDP?
These payments are not included in GDP because they are not received in exchange for production of a new good
What is not included in GDP?
Value of leisure is not included Not adjusted for pollution or other negative effects of production Not adjusted for changes in crime and other social problem Measure the size of the pie, but not how the pie is divided
How is income divided?
Wages, interest, rent, and profit
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
When calculating GDP, when is intermediate goods calculated?
We include the value of the Ford truck but not the value of the tire. If we included the tire, that would be double counting
How is GDP measured in production?
We measure production by taking the value, in dollar terms, of all the goods and services produced
Consumption
Spending by households on goods and services, not including spending on new houses
Economic Growth
The ability of an economy to produce increasing quantities of goods and services
Business Cycle
Alternating periods of economic expansion and economic recession
Household production and the underground economy ...
Are not accounted for in the Bureau of Economic Analysis' estimates of GDP
What are the three different types of spending?
Business fixed investments, Residential investments, and Changes in business inventories
Underground Economy
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
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.
Transfer Payment
Payments by the government to households for which the government does not receive a new good or service in return. These include social security payments
Difference between Real GDP v Nominal GDP?
Real GDP holds prices constant, which makes it a better measure than nominal GDP of changes in the production of goods and services from the next
Household Production
Refers to the goods and services people produce themselves, the most important type of household production is the services a homemaker provides
Government Purchases
Spending by federal, states and local governments on goods and services likes teachers; salaries, highways, and aircraft carriers
Which levels of government spending are included in government purchases?
Spending by federal, states, and local governments
Investment
Spending by firms on new factories office buildings, machinery, and additions to inventories, plus spending by households and firms on new house holds
GDP Equation
Y = C + I + G + NX GDP = Y C = Consumption I = Investments G = Government Purchases NX = Net Export