Econ CH 23 - National Income

Wendy built a home in 1995 at a construction cost of $100,000. In 2021, she sells is to Peter for $300,000, although real estate agents take 6% of the sale price. Wendy then moves into a new home she built in 2021 at a construction cost of $450,000. How much do these transactions contribute to 2021 GDP?

$468,000 This is calculated through the 6% commission on the sale of Wendy's first home at $300,000 (yielding a commission of $18,000) and adding it to the new construction cost of $450,000. Giving a total of $468,000

Nominal GDP equation

= # units produces * avg mkt price

Real GDP formula

= current years quantity x base years price =

What makes up the GDP?

GDP = Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M))

GDP per capita

GDP divided by population

Nominal GDP

GDP measured in current prices

GDP per capita formula

GDP per capita = (GDP) / (population)

In December of 2015, the BYU Creamery buys $40,000 worth of milk and spend $5,000 on packaging and equipment to produce ice cream. It sells half of the cartons of ice cream to consumers for $35,000; the other half remain in the freezer and are sold at the same price in January of 2016. How much do these actions add to 2015 GDP? A. -$10,000 B. $10,000 C. $35,000 D. $40,000 E. $70,000 F. None of the above is correct.

Intermediate goods do not count toward GDP. Final goods sold during a year and new goods added to inventory are both counted toward GDP. $35,000 of ice cream is sold, and $35,000 of ice cream is added to inventory. This contributes $70,000 to 2015 GDP.

What is the GDP deflator formula?

Nominal GDP/Real GDP x 100

Economists realize that some productive activities are not included in GDP. Which of the following explains why economists still use GDP as a measure of welfare?

Without market prices, any value placed on these unmeasured activities will be subjective.

Why does GDP fluctuate?

because autonomous spending fluctuates

What is not counted in GDP?

intermediate goods, transfer payments and non-market activities, used goods, illegal goods, exchanges

What is NX?

net exports

Suppose Dodge builds $40 million of the Charger vehicles in 2017 but they remain unsold. In 2018, they are purchased for $35 million by city police departments as cop cars. Because of these transactions, A. government (G) will be $35 million higher in 2018. B. investment (I) will be $35 million lower in 2018. C. GDP will be $40 million higher in 2017. D. A & B E. A & C F. C & B G. A & B & C H. None of the above

A, B, C These govt purchases are +G in 2018, but pulled from inventories (-I) in 2018. They were placed in inventories (+I) in 2017.

Which of the following transactions is included in the calculation of total GDP? A. The purchase of tutoring services from a tutor who resides in the country but holds foreign citizenship. B. The purchase of a new edition of a foreign textbook that was produced in a different nation. C. The purchase of paper supplies by a textbook company for the production of new textbooks. D. The purchase of a used textbook from a friend who took the same class last year.

A. The purchase of tutoring services from a tutor who resides in the country but holds foreign citizenship because the purchase of goods and services counts in the country the service was purchased, regardless of citizenship.

John is hosting a golf tournament in Arizona. He purchases $10,000 of golf balls with his logo from a Mexican manufacturer. The immediate effect on US GDP is A. NX decreases by $10,000. B. C increases by $10,000 and NX decreases by $10,000. C. NX increases by $10,000. D. C decreases by $10,000 and NX increases by $10,000.

B. C increases by $10,000 and NX decreases by $10,000. John is consuming the balls (so increases US Consumer expenditures), but they com from abroad as imports (so decreases US Net Exports)

What is the difference between a final good and an intermediate good?

Final goods are referred to as those goods which do not require further processing. These goods are also known as consumer goods and are produced for the purpose of direct consumption by the end consumer. Intermediate goods are referred to as those goods that are used by businesses in producing goods or services. Final Good- Textbook Intermediate Good- Paper for textbook production

Facebook is building a data center in Eagle Mountain, Utah. Suppose they purchase and install $250 million of computer servers manufactured in the US. This purchase will have what effects on consumption, investments, and GDP?

GDP will increase by 250 million because of an investment made by facebook. So it would increase investment and total GDP by $250 million.

If the GDP deflator rises, what has happened to prices?

Prices were raised

Real GDP formula

REAL GDP = Nominal GDP/GDP Deflator x 100 Real GDP = (Nominal GDP/Deflator) x 100

If you have nominal GDP and the Deflator, how do you find the real GDP

Real GDP = (Nominal GDP/Deflator) x 100

In 2014, Abnormalia had a population of 3,000, a real GDP of 11,400,000, and a CPI of 170. In 2015, it had a population of 2,500, a real GDP of 10,000,000, and a CPI of 200. What was the approximate growth rate of real GDP per capita in Abnormalia between 2014 and 2015?

Real GDP per capita in 2014 is 11,400,000 / 3,000 = 3,800 Real GDP per capita in 2015 is 10,000,000 / 2,500 = 4,000 Let x = 1+ %growth. Then 4000 = 3800x. x=1.05263, so real GDP per capita grew by 5.2%.

Consider two cars manufactured by Chevrolet in 2013. During 2013, Chevrolet sells one a new Volt to Sean for $24,000. Later in the same year, Sean resells the Volt to Kati for $30,000. The second car, a Cruze with a market value of $19,000, is unsold at the end of 2013 and it remains in Chevrolet's inventory. These transactions contribute how much to GDP for 2013?

The new Volt is produced and sold in 2013, so its sale to Sean counts toward GDP. Used items, including Sean's Volt sold to Kati, do not count. The Cruze was produced in 2013, so it counts toward GDP as inventory. So the answer is $24,000 + $19,000 = $43,000

Why do some nations grow faster than others?

Countries can specialize in the goods and services they produce best and trade for the goods and services they produce relatively less efficiently. The more countries can specialize and trade, the more economic growth they will realize in the long run.

Why do some nations have more output than others?

Differences among countries can be attributed to differences in human capital, physical capital, and productivity.

A country reported nominal GDP of $100 billion in 2007 and $95 billion in 2008. It also reported a GDP deflator of 25 in 2007 and 20 in 2008. Between 2007 and 2008, real output _____ and the price level _____. A. fell; fell. B. rose; fell. C. rose; rose. D. fell; rose.

We can see the price level fell from the GDP deflator dropping from 25 to 20. Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: 2007 Real GDP = $100b * 100 / 25 = $400b 2008 Real GDP = 955b * 100 / 20 = $475b As a result of this, the real output rose and the price level fell. (Answer B)

Gross Domestic Product

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

Real GDP

the production of goods and services valued at constant prices

How is GDP inaccurate?

•Does not measure leisure, home production, family life •Does not measure lost resources

How is GDP accurate?

•Does reflect a standard of living •Correlated to opportunities for education, life expectancy

Disney prints $300 million of Star Wars 7 BluRay discs in 2016, but sells only $240 million of them in 2016, while the rest are sold in 2017. How will this affect GDP? (answers listed in millions of dollars) 2016 Consumption: ______ 2016 Investment: ________ 2017 Consumption: ______ 2017 Investment: ________ A. +300, -60, +60, -60 B. +240, 0, +60, 0 C. +300, +60, -60, 0 D. +240, +60, +60, -60 E. +240, -60, -60, +60 F. +300, -60, 0, +60

$240 mil is spent by consumers on discs in 2016, increasing consumption. The remaining $60 were produced in 2016 but placed in inventory, increasing 2016 Investment. When the discs sell in 2017, they are removed from inventory (decreasing I) and purchased by consumers (increasing C). Investment goes to 0 in 2017 because all of the discs are sold off. D. +240, +60, +60, -60

Consider two cars manufactured by Chevrolet in 2017. During 2017, Chevrolet sells one of the two cars to Sean for $24,000. Later in the same year, Sean sells the car to Kati for $19,000. The second automobile, with a market value of $30,000, remains unsold on a dealer's by the end of 2017. The transactions just described contribute how much to GDP for 2017? A. $24,000 B. $43,000 C. $49,000 D. $54,000 E. $73,000

$54,000 The resale of the first car is not included, but the original sale is. The unsold car also enters. so $24k + $30k = $54k.

If a Canadian buys a bicycle made in the US, then US net exports will ________, US consumption will ________, and US GDP will _______. A. increase; decrease; increase. B. increase; decrease; not change. C. increase; not change; increase. D. increase; not change; not change. E. not change; decrease; increase. F. not change; decrease; not change. G. not change; not change; increase. H. not change; not change; not change.

ANSWER C The US increases exports when the bikes are sold. The consumer is not in the US, so US consumption is unchanged. GDP increases. SO U.S net exports will Increase, U.S consumption will Not Change, and the GDP will Increase

Which of the following transactions increases U.S. GDP for 2010? A. In 2009, Marvin Windows manufactures 20 windows that remain in Marvin's inventory. They are sold to a home owner in early 2010. B. The state of Utah provides an unemployed worker with $5000 of benefits during 2010. C. An Irish marketing consultant works in Boston during the summer of 2010 and earns $30,000 during that time. D. Two of the above. E. All of the above. F. None of the above.

An Irish marketing consultant works in Boston during the summer of 2010 and earns $30,000 during that time. Marvin added the windows to his inventory in 2009, so they only count toward 2009 GDP. Even though he sold them in 2010. The unsold windows would become an investment, and the investment would become lower in 2010 The state of Utah paying unemployed workers is a transfer of money, not a payment for goods or services. Since the consultant worked and was compensated in America, his salary counts toward US GDP.

Which of the following transactions will increase US GDP? A. Goodyear tires (in the US) sends $30 million of tires to Japan, where they are placed on new Lexus cars then sold in the US for $500 million. B. US individuals reduce their cooking at home, switching to eat similar meals at local restaurants. C. Ford (in the US) sells $50 million of cars to consumers in Canada.

Answer B is correct because switching home cooking for restaurant cooking will increase GDP because the home cooking does not include all the labor and capital costs of food preparation since home preparers do not purchase them in market transactions. Answer C is Correct because Ford's sales are exports, and would show up as an increase in NX and thus GDP. *****It is not answer 'A' because the tires are considered an intermediate good

Last year country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living? A. Country A because it had the higher real GDP per person. B. Country B because it had the higher nominal GDP per person. C. Country B because it had the higher real GDP per person. D. Country A because it had the higher nominal GDP per person.

Country B because it had the higher real GDP per person. We use real GDP per capita to determine standard of living. Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: Country A Real GDP = $600b * 100 / 150 = $400b Country B Real GDP = 720b * 100 / 120 = $600b Divide by population to get per-capita real GDP: Country A per capita = 400b / 40 mil = $10,000 Country B per capita = 600b / 50 mil = $12,000

Suppose that twenty-five years ago a country had nominal GDP of $1,000, a GDP deflator of 200, and a population of 100. Today it has nominal GDP of $3,000, a GDP deflator of 400, and population of 150. What happened to the real GDP per person? A. It is unchanged. B. It increased, but by less than double. C. It more than doubled. D. It exactly doubled. E. It has decreased.

Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: 25 years ago Real GDP = $1,000 * 100 / 200 = $500 Today's Real GDP = $3,000 * 100 / 400 = $750 Divide by population to get per-capita real GDP: 25 years ago GDP per capita = 500 / 100 = $5 Today's GDP per capita = 750 / 150 = $5 So it is unchanged

Quality Motors is a Japanese-owned company that produces automobiles; all of its automobiles are produced in American plants. In 2017, Quality Motors produced $20 million worth of automobiles, with $12 million in sales to Americans, $6 million in sales to Canadians, and $2 million worth of automobiles added to Quality Motors' inventory. The transactions just described contribute how much to U.S. GDP for 2017? A. $0 million B. $12 million C. $14 million D. $20 million E. $34 million

Since Quality Motors produced all its cars in American plants, they count toward US GDP no matter where they are sold. CORRECT ANSWER D

The federal government pays a contractor living in Virginia $350 for his services in web design. This contractor then spends some of this income to buy a $100 blu-ray player made in Japan by a Japanese firm and $200 for fruit and vegetables from a local farmer. As a result of these transactions, U.S. GDP increases by A. $100. B. $200. C. $300. D. $350. E. $450. F. $550. G. $650.

The $350 paid to the contractor and the $200 to the local fruit stand both increase US GDP. So it increases by $550 (Answer F) The $100 increases C, but decreases NX as the Blu-ray player was made in Japan by a Japanese firm.

A U.S. citizen buys a cell phone manufactured in China by a company that is owned and operated by U.S citizens. In which of the following components of U.S. GDP is this transaction accounted for? A. imports but not consumption B. consumption and imports C. consumption but not imports D. neither consumption nor imports

The answer is Consumption and imports because the US citizen bought a phone from a US company, the purchase does count as US consumption. The phone has to be imported from China, so imports are also affected by the transaction.

Alex is a US resident who made all of the following transactions in 2017. Which one directly increases 2017 US GDP? A. January: Bought a brand new 2016 Honda Civic, left over on the dealer's lot from last year. B. February: Bought a treadmill at a yard sale for $100. C. March: Traded services, designing a website (a service he normally sells for $800) for his photographer friend, Bob, in exchange for Bob shooting Alex's wedding. D. April: Received $800 from a Canadian toy producer to design their website. E. May: Spent $1200 on trains, hostels, and food while backpacking through Europe on a honeymoon.

The correct answer is D because off the following reasons It is not answer A because the car is counted in 2016 GDP, not 2017 It is not answer B because it is a used good and those are not counted in GDP It is not answer C because trades/exchanges are not counted in GDP It is answer D because ALEX works in the USA and his payment will be counted towards GDP It is not answer E because his purchases and spending would effect the GDP of Europe, and not the USA

A country reported a nominal GDP of $115 billion in 2018 and $105 billion in 2019; it reported a GDP deflator of 90 in 2018 and a deflator of 80 in 2019. Between 2018 and 2019, A. real output and the price level both fell. B. real output rose and the price level fell. C. real output fell and the price level rose. D. real output and the price level both rose.

We can see the price level fell from the GDP deflator dropping from 90 to 80. Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: 2018 Real GDP = $115b * 100 / 90 = $127.8b 2019 Real GDP = $105b * 100 / 80 = $131.3b B. real output rose and the price level fell.

A country reported a nominal GDP of $115 billion in 2018 and $105 billion in 2019; it reported a GDP deflator of 90 in 2018 and a deflator of 80 in 2019. Between 2018 and 2019, A. real output and the price level both fell. B. real output rose and the price level fell. C. real output fell and the price level rose. D. real output and the price level both rose.

We can see the price level fell from the GDP deflator dropping from 90 to 80. Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: 2018 Real GDP = $115b * 100 / 90 = $127.8b 2019 Real GDP = $105b * 100 / 80 = $131.3b So the real output rose and the price level fell

Last year country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living? A. Country A because it had the higher real GDP per person. B. Country B because it had the higher nominal GDP per person. C. Country B because it had the higher real GDP per person. D. Country A because it had the higher nominal GDP per person.

We use real GDP per capita to determine standard of living. Real output is found from dividing nominal GDP by the GDP deflator, then multiplying by 100: Country A Real GDP = $600b * 100 / 150 = $400b Country B Real GDP = 720b * 100 / 120 = $600b Divide by population to get per-capita real GDP: Country A per capita = 400b / 40 mil = $10,000 Country B per capita = 600b / 50 mil = $12,000 So Country B would have the higher standard of living. Making the correct answer B