GDP

A recession occurs when an economy experiences a period in which there is

A decrease in total production

Final Good or Service

A final good or service is one that is purchased by its final user and is not included in the production of any other good or service. Examples of final goods are a hamburger purchased by a consumer and a computer purchased by a business.

Value Added Method

An alternative way of calculating GDP is the ​value-added method. Value added refers to the additional market value a firm gives to a product and is equal to the difference between the price for which a firm sells a good and the price it paid other firms for the intermediate goods. The total value added will always equal the sale price of the final good. Put​ differently, the sale price of a good equals the sum of the value added at each step in the production process.

Indicate whether each of the following is a final good, an intermediate good, or neither.

Coffee beans purchased by a coffee shop: intermediate good One share of Google stock: neither A new pick-up truck purchased by a consumer: final good A new home purchased by a family: final good

Which of the following is true about the consumption component of U.S. GDP in​ 2014?

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

Decrease in total production

Decrease in total​ production: If workers replace paid production with household​ production, then total production will decrease if the workers had been paying other people to perform the household activities prior to unemployment.

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

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 of they are.

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

Households

The​ circular-flow diagram shows that all sources of income are owned by

Households

When examining the​ circular-flow diagram,

Households can use some of their income to purchase goods from foreigners as imports

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 whether or not that production is included in the calculation of GDP 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.

The difference between microeconomics and macroeconomics is

Microeconomics is the study of economics at an individual, group or market level. Macroeconomics, on the other hand, is the study of a national economy as a whole.

No Change in total production

No change in total​ production: If workers replace paid production with household​ production, then total production will not change so long as the household production did not occur prior to unemployment.

Which of the following is true about the government purchases component of U.S. GDP in​ 2014?

Purchases by state and local government was greater than purchase by the federal Gov.

The Council of Economic Advisors to the President of a country reported gross investment expenditure at​ $400,000 during a particular year. The group excluded from this valuation an amount of​ $50,000 spent by an existing domestic firm during the year.​ Mark, an​ economist, argued that this amount should have been included under the business fixed investment component of GDP. Which of the​ following, if​ true, would support​ Mark's argument?

Purchasing new machinery worth​ $50,000 for its production facility during that year qualifies for inclusion under the business fixed investment category of GDP because it describes an investment in new machinery to expand production infrastructure.

Intermediate Good

Some goods and​ services, though, are used in the production of other goods and services. For​ example, General Motors does not produce tires for its cars and​ trucks; it buys them from tire​ companies, such as Goodyear and Michelin. The tires are an intermediate good​, while a General Motors truck is a final good.

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

Spending by federal, state, and local government.

Which of the following statements about the consumption component of GDP is not​ correct?

Spending on services is smaller than the amount of consumption spending on durable and nondurable goods.

We often use real GDP per capita LOADING... as a measure of a​ country's well-being. Review the definition of real GDP per capita before answering the following question. ​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.

Real GDP per capita

The level of GDP per​ person, calculated by dividing the value of a​ country's real GDP by the​ country's population.

GDP is

The market value of all final goods and services produced in a country during a period of time.

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

The purchase of new machinery, factories, or houses

The country of Alaine produces​ 1,000 tons of corn during a year. It is valued at​ $500 per ton. A lobbyist for the corn industry in Alaine argues that the total value of corn production should be included in the​ country's GDP for the same year. The​ lobbyist's claim is based on the assumption that

The​ lobbyist's claim is based on the assumption that corn is not used in the production of other goods because only the value of final goods and services is included in GDP calculations. If this is not true and corn is used in the production of other​ goods, then the value of that corn would not be included in​ Alaine's GDP.

The​ circular-flow diagram shows that​ ________ should equal​ ________.

Total expenditure should equal total income

The business cycle exists because

Total production experiences periods of increases and decreases

Which of the following equations sums up the components of Gross Domestic Product​ (GDP)?

Y=C+I+G+NX tells us that GDP​ (denoted Y) equals consumption​ (C) plus investment​ (I) plus governments purchases​ (G) plus net exports​ (NX). Next Question

Inventories are part of investment and therefore included in GDP because

firms produce goods, however sometimes the goods may be unsold at the time GDP is computed

One major component of GDP that can be negative is

net exports

Transfer payments are not included in GDP calculations because

transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service.

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

What are the four categories of​ income?

wages, interest, rent, profits

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 income.

During the current​ year, the government in the country of Brungaria has adopted a fiscal stimulus package to boost economic growth. The stimulus package is a major factor behind the increase in government purchases this year. As a result of these​ policies, Brungaria will experience a substantial increase in overall​ employment, gross​ investment, and consumption expenditure. In​ response, the Economic Advisory Committee of the government announces at a press conference that these results will ensure that​ Brungaria's GDP will be higher this year than it was in the previous year. Which of the​ following, if​ true, would undermine the claim of the Economic Advisory​ Committee?

​Brungaria's exports have fallen significantly in the current year. Net exports are part of the GDP calculation and if exports​ fall, then GDP could fall even if the other components rise. Next Question

What are the four major categories of​ expenditure?

​Consumption, investment, government​ purchases, and net exports.