Chapter 9: Gross Domestic Product

To get an idea of the scale of illegal production, the best estimate is that illegal drugs have annual sales of over

$100 billion.

If the price of video games was to increase from $60 to $80 that would indicate a

33% increase.

If the price of a gallon of gas was to increase from $2 to $3 a gallon, that would indicate a

50% increase.

Consumer goods and services account for approximately _____ of GDP.

70%

Comparing the GDP across two nations gives us

a fairly close approximation of production.

When comparing gross and net investment

depreciation is not counted in net investment but is counted in gross investment.

If you decide to spend the weekend volunteering to clean the city park so that your kids have a safe place to play your efforts

do not add to GDP.

Free digital services like Twitter and Skype

do not add value to the economy and are rightly excluded from GDP.

When there is a drastic improvement in the quality of a product produced GDP

does not change.

It is important to remove depreciation from GDP since it

does not represent a gain to the economy when it is replaced by new equipment.

If output is falling, nominal GDP is rising we know that

inflation was higher than the drop in output.

The underground economy causes GDP to significantly understate production since

it is not counted in GDP.

Gambling is counted in GDP

it is placed at a legal casino.

GDP may not be a good measure of economic well-being because

it tells us how much we produce not what we produce.

The number one cash crop in California is

marijuana.

Financial transactions are

not directly counted in GDP but may be used to purchase plant and equipment which is counted.

When calculating GDP, leisure time is

not taken into account.

GDP is not a good measure of national economic well-being since

one single number cannot provide all the information we need.

When you choose to do volunteer work

our economic well-being is improved but GDP is not.

If nominal GDP rose but real GDP fell, we can conclude

output must have fallen but prices rose faster.

Real GDP divided by the population is known as

per capita real GDP.

Basically, free access to the Internet causes

perhaps trillions of dollars of services to go uncounted.

To find the per capita GDP, we would take real GDP and divide it by the

population.

Any good or service that people are willing to pay for is called

production.

When comparing Real versus nominal GDP

real GDP is adjusted for inflation.

The unreported production of goods and services is known as the

underground economy.

Over time some household production has shifted toward the market place because

we now hire people to do tasks we previously did ourselves.

If $0.04 worth of wheat is packaged and shipped to a bakery for $0.10 is used to create a loaf of bread that is now worth $0.50. If the bread is now packaged and sold for $1.19, its value in GDP would be _____.

$1.19

If an economy has a GDP of $20.5 trillion and there is depreciation of $3.5 trillion, then the NDP for the economy would be

$17 trillion.

If we observe that the level of investment is $500 and notice that we have depreciation of $50, we can calculate the net investment as _____.

$450

If the level of investment is $700 and notice that we have depreciation of $140, we can calculate the net investment as _____.

$560

Household production would include

- a grandparent watching their grandchildren so that the parents can work. - two mothers exchanging childcare services based on work schedules.

Because of the underground economy, for the United States GDP underestimates production by:

- about $2 trillion. - one eighth of GDP.

The underground economy

- adds hundreds of billions of dollars of goods to national output. - is 10 or 15% of the economy.

Gross domestic product (GDP) includes expenditures on:

- final services. - final goods.

Examples of household production shifting to the market place include

- hiring a lawn service to mow your lawn instead of the teenager next door. - eating out rather than cooking at home.

When we are calculating GDP, we need to be careful and avoid:

- including transfer payments. - double counting of output.

Because internet access is basically free:

- it provides billions perhaps trillion of dollars to our economy. - it has added to our standard of living since the prior generation.

GDP comparisons across nations cannot be made with great precession because:

- nations use different national income accounting systems. - exchange rates among nations fluctuate wildly.

The human costs of production include

- psychic cost. - physical strain.

All transactions in the underground economy are

- untaxed. - unreported.

When real GDP increases from $20 trillion to $22 trillion that represents a

10% increase in output.

Comparing the production of the United States and Mexico is made more difficult since the underground economy is

15% in the United States and 67% in Mexico.

When real GDP increases from $10 trillion to $12 trillion that represents a

20% increase in output.

_________ domestic production is the sum of consumption, net investment, government purchases, and net exports.

Blank 1: Net

_________ GDP is the value of the final goods and services produced in a given year valued at that year's prices, while __________ GDP is corrected for inflation.

Blank 1: Nominal Blank 2: Real

____________ is any good or service that people are willing to pay for.

Blank 1: Production

The underground economy adds hundreds of _________ of dollars of goods to our national output.

Blank 1: billions

When calculating the net investment, we remove ________.

Blank 1: depreciation

When equipment wears out, it is generally replaced with new, resulting in the company being right back where it started, this means we need to worry about _________ when measuring output.

Blank 1: depreciation

In order to avoid double counting when we calculate GDP, only expenditures on ________ products belong in GDP.

Blank 1: final

In the equation GDP = C + I + G + Xn, the I represents ________ investment.

Blank 1: gross

Calculations of GDP do not take the ________ and _________ costs of production into consideration.

Blank 1: physical Blank 2: psychological

Approximately ________ percent of GDP is made up of spending on consumer goods and services.

Blank 1: seventy, sixty-nine, 70, 69, 70%, 69%, sixty-eight, 68, or 68%

True or false: Although GDP is a flawed measure, we can easily construct a different number that can objectively measure our economic well-being.

False

True or false: When we use net exports instead of total exports, we are calculating net domestic product (NDP) instead of gross domestic product (GDP).

False

True or false: Since the underground economy is different among nations it is difficult to compare output across nations.

True

Suppose that we have two nations (North and South Atlantis) with exactly the same levels of consumption, gross investment, government purchases, and net exports. They are identical in every way except North Atlantis uses older equipment and therefore has a slightly larger depreciation we can conclude that

although they have the same GDP, South Atlantis would have the higher NDP.

Illegal activities such as dope, prostitution, and gambling

are not counted in GDP.

In order to get an accurate calculation of GDP, we need to

avoid double counting by only counting the final product.

Suppose two nations, North and South Relaxia, have the exact same real production, but they need to work longer hours in South Relaxia, when comparing real GDP

both nations have the same real GDP.

Purchase of stocks and bonds may impact the GDP when

businesses use the funds for plant and equipment.

The nation's expenditure on all the final goods and services produced in the economy during the year at market prices is known as

gross domestic product.

In calculating GDP, the I represents

gross investment.

Work done by homemakers, growing of food in backyard plots, home repairs, and the production of any other goods and services consumed in the household is known as

household production.

Although they provide a valuable service to the economy free digital services such as Twitter are excluded from GDP because

there is no objective identifiable measure of their value.

In 1940 a 17-inch black and white TV cost $600, today we can get a 50-inch smart TV for the same price. In terms of GDP (in the year that they were produced),

they both contributed the same to their respective years GDP.