Macro Economics Chapter 5: The Wealth of Nations

Percentage Change Formula

%Change Real GDP 2010= (RealGDP2010-RealGDP2009)/(RealGDP2009) X100

Annual Inflation Rate Formula

%Change2010= (CPI2010-CPI2009)/CPI2009 X 100

In May 2013, the value of the Consumer Price Index (CPI) in a certain country, Polonia, reached an all-time high of 202 index points and per capita nominal GDP was $39,600. In January 1950, the CPI was at its lowest at 68 index points. Per capita nominal GDP in 1950 was $8,600. Calculate real GDP per capita for 1950 by converting that year's nominal GDP per capita into current (2013) dollars 1. For 1950, real GDP per capita (in 2013 dollars) was _______ 2. For the people of Polonia, life satisfaction was likely higher in ________. The level of life satisfaction hinges on the correlation between happiness and real GDP per capita. Surveys done by social scientists indicate ___________ between life satisfaction and real GDP per capita.

1. $25,547.1 2. 2013 3. A robust positive relationship

Suppose for the year 2013 the economy of Uplandia has a nominal GDP of $5,500 billion and a real GDP of $3,300 billion. 1. For 2013, this economy's GDP deflator is _______. Now suppose the GDP deflator in 2012 was 154.7 2. Uplandia's year-over-year inflation rate is _____%.

1. 166.7 2. 7.8%

What is omitted from GDP?

1. Physical Capital (Ex: Machines & Buildings, Not Labor) 2. Home Production (Ex: Veggie Garden or At home childcare) 3. Underground Economy (Ex: Illegal, Tax Evasion)

What are the 3 ways to measure GDP?

1. Production 2. Expenditures 3. Income Approach

Who buys U.S. GDP?

1. U.S. Consumers 2. U.S. Business (I) 3. U.S. Governments (G) 4. Exports

What are examples of "Factors of Production?"

1. Wages (Labor) 2. Rent (Land) 3. Interest (Capital) 4. Profits (Entrepreneur)

Which of the following news stories​ (all published in early​ 2014) would typically be studied in​ macroeconomics? (Select all that apply) A."Expectations High for March​ Employment." B.​"5 Reasons Why Apple is Looking Like the Next​ Sony" C."Which College long dash—and Which Major long dash—Will Make You​ Richest." D. ​"We Believe Inflation Should Rule Monetary​ Policy." E.​"What If Economic Growth Is No Longer​ Possible?"

A, D, and E

What is the key difference between the Consumer Price Index (CPI) and the GDP deflator? A. The two indexes measure price changes for different​ "baskets" of products. B. The GDP deflator includes​ imports, while the CPI only includes domestically produced goods and services. C. The CPI is broader in coverage than is the GDP deflator. D. The formulas used to construct the indexes bear little resemblance to each other.

A. The two indexes measure price changes for different​ "baskets" of products.

What is the Income Approach?

All income paid to the "factors of production" + Sum Adjustments for taxes & depreciation

Which of the following will be considered a final good in the calculation of U.S.​ GDP? ​(Check all that apply​.) A. Transmissions manufactured in Alabama for for Ford's range of F-series pickup trucks B. Defense equipment purchased by the federal government C. Golf outings at courses by North Carolina D. Dress shirts purchased by a men's clothier

B. Defense equipment purchased by the federal government C. Golf outings at courses in North Carolina

Consumer Price Index

CPI 2010= Cost in 2010/Cost in Base Year X 100

What does C stand for?

Consumer Spending

What is Nominal GDP?

Current Year Prices

If the level of aggregate expenditure was​ $16.8 trillion in​ 2013, the level of aggregate income in the economy during 2013 was​ ___________. A. less than​ $16.8 trillion because taxes will reduce income below aggregate expenditure. B. more than​ $16.8 trillion because transfers​ (entitlements) allow income to exceed aggregate expenditure. C. less than​ $16.8 trillion because the United States imports more than it exports. D. also​ $16.8 trillion because of the identity between aggregate expenditure and income.

D. also​ $16.8 trillion because of the identity between aggregate expenditure and income.

You decide to cook your own meal rather than eat in a restaurant. As a result, GDP estimates will ________.

Decrease

Why is it essential to differentiate between real and nominal growth rates of​ GDP? A. The nominal growth rate is more informative than the real growth rate since it is broader in the sense that it captures both price and output changes. B. It is the real growth rate that is meaningful since it indicates the change in the production of goods and​ services, a very significant source of improved living standards. C. The nominal growth rate combines the effect of price changes along with changes in the production of goods and services and thus gives a less clear indication of the impact on living standards. D. All of the above. E. B and C only.

E. B and C only

Items are classified as final goods only if they are the ________ in a chain of production.

End Product

What does X stand for?

Exports

What is Production Approach?

Final # of g & s produced X market price/unit Ex: 5 million cars X $30,000 = $150 Billion

What does Y stand for?

GDP or Total Income

GM & Tires made by Goodyear New Auto Sells ($25,000) Bought Tires ($400) What is the GDP? 3 years later you pay $600 for tires. What is the GDP?

GDP: $25,000 GDP: $25,600

What does G stand for?

Government Spending

What is Real GDP?

Holding prices fixed to a "base year"

What does M stand for?

Imports

What is the Consumer Price Index?

Index to measure the cost of all fixed market basket of g & s that consumers buy

What does GDP exclude?

Intermediate g & s Used Goods

What does the Circular Flow Diagram show?

Production=Expenditures=Income=GDP

GDP Deflator Formula

Real GDP(2010) = (Nominal GDP 2010 /GDP Deflator 2010) X 100 Ex: Assume the base year is 2000, P2000= 100 Real GDP2010= $15T/120 X 100 $3T/24 X 100 =$12 T in base year prices (2010)

What is the formula for Savings & Investment?

S=Y-C-G

What is Expenditures Approach?

Sum of expenditures on all final g & s in one year

What is the Expenditure Approach?

Total Income=Total Expenditures

What is Gross Domestic Product (GDP)?

Value of all FINAL g & s produced domestically in a period of time

What is the formula for the Expenditure Approach?

Y=C+I+G+(X-M)

What important factors do GDP estimates leave​ out? ​(Check all that apply​.) a. The production of illegal professions b. Home Production c. The value of intermediate goods d. Leisure e. Capital depreciation

a. The production of illegal professions b. Home Production d. Leisure e. Capital depreciation