Chapter 27

If gross domestic product is $13 billion and consumption of fixed capital is $2 billion, then what does net domestic product equal?

$11 billion

The value of the GDP price index will be ______ for the base year.

100

If a market basket of household goods was priced at $200 in the year 2000 and rose to $600 in the year 2020, what is the price index for the year 2020?

300

A gross domestic product of $5 billion and consumption of fixed capital of $1 billion yields a net domestic product of $ blank billion.

4

If the nominal GDP of an economy is equal to $15 billion and the price index is equal to 300, then real GDP of the economy would be $

5 billion

What effect does quality improvement have on GDP?

It improves GDP.

Which of the following statements are true of a price index?

It measures the price of a set of goods of services in a given year. It is expressed in terms of a base, or reference, year.

___ is computed using current prices.

Nominal GDP

What is the difference between real GDP and nominal GDP?

Real GDP is adjusted to reflect changes in the price level, whereas nominal GDP is unadjusted.

For the purposes of GDP accounting, what do government purchases include?

The purchase of new military equipment Spending on highway construction

Which of the following is not an example of a personal consumption expenditure?

a fighter jet

The primary measure of the economy's performance is its annual total output of goods and services, which is called its ______.

aggregate output

GDP does not reveal if the current product mix of goods and services is enriching or potentially detrimental to society because ______.

all products are assigned the same weight if they sell for the same price

In the circular flow diagram, which sector of the economy is associated with net export expenditures?

foreign

One of the flaws of GDP is that it ______.

ignores transactions that do not take place in organized markets

By ignoring the value of leisure time, how does national income accounting affect our well-being?

it understates our well being

Real GDP is equal to ______.

nominal GDP divided by a price index (in hundredths)

blank GDP uses current prices, while blank GDP uses prices that adjusted for inflation.

nominal, real

GDP may be understated because ______.

nonmarket activities are not included in GDP

GDP does not capture the full value of improvements in product quality because GDP is a(n) blank instead of qualitative measure

quantitative

In order to determine whether increases or decreases in nominal GDP are the result of changes in prices, changes in output, or some combination of those two factors, economists calculate

real GDP

When GDP is measured using "adjustments for price changes", it is known as

real GDP

The main reason to participate in the underground economy is to avoid ______.

reporting actual income and paying income taxes

What is the term for the buying and selling of stocks and bonds?

stock market transaction

Real GDP is gross domestic product measured

to reflect changes in the price level

The ______ sector of the economy is hard to track and therefore not included in ______.

underground, GDP

Gross domestic product calculations count only final goods and services because ______.

counting all intermediate goods and services would lead to double-counting of many activities

Because members of the underground economy do not report their full income to the Internal Revenue Service, their economic activities are not included in the calculation of

GDP

Which of the following is equal to net investment?

Gross investment minus depreciation

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

What are reasons that the underground economy exists?

People want to avoid taxes. People are engaged in illegal activities.

Which are examples of negative gross domestic by-products?

Polluted water Noise Congestion

n national income accounts, what does value added refer to?

The difference between the market value of a firm's output and the value of the inputs purchased by the firm

One of the shortcomings of GDP is that it doesn't reveal anything about which of the following?

The distribution of output

Gross domestic product (GDP) may be calculated as the sum of ______.

consumer spending, investment spending, government purchases of goods and services, and net exports

The depreciation charge made against private and publicly owned capital each year is called ______.

consumption of fixed capital

Viewing GDP in terms of earnings derived or created by producing something is called the ______ approach.

income

Real gross domestic product (GDP) is a measure of GDP that:

controls for price changes by using a base year to calculate the GDP for a year

National income is the sum of compensation of employees, rents, interest, proprietors' income, taxes on production and imports, and ______.

corporate profits

Retained earnings are a category of ______.

corporate profits

The difference between the income Americans earn abroad and the income foreigners earn in the United States is called ______ income.

net foreign factor

What is gross rental income minus depreciation of the rental property?

net income

The formula for calculating a price index is ______.

price of market basket in a specific year divided by price of same market basket in base year multiplied by 100

What is it called when there is a transfer of funds from one private individual to another?

private transfer payment

The buying and selling of blank and blank is not included in GDP because it is just a matter of swapping bits of paper.

stocks and bonds

Nominal GDP is not an accurate measure of the real level of economic activity in a country because ______.

inflation distorts the real value of all goods and services produced

Including the value of blank goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.

intermediate

Goods and services that are used up in the production of final goods are called

intermediate goods

Depreciation is subtracted from GDP to determine ______.

net domestic product

The difference between the amount of goods sold abroad and goods that are purchased from abroad is known as ___

net exports

When dealing with international trade, economists include ______ as a component of GDP.

net exports

The market value of a firm's output minus the value of the inputs the firm has bought from others is called ______.

value added

Which of the following are types of private domestic investment expenditures?

Any increase in inventories Newly produced housing Spending on new plants and equipment

NDP is GDP adjusted for

depriciation

The estimated amount of capital being used each year is called ______.

depriciation

The amount of income that households have left over after paying their personal taxes is ______ income.

disposable

The after-tax profits that are distributed to stockholders are called

dividends

A country's gross domestic product (GDP) is a measure of ______ produced within an economy during a specific period of time.

dollar value of all final goods and services

The purpose of retained earnings is to save money for ______.

future investments in capital

Goods that are produced in a particular period but not sold in that period ______.

go into inventory and considered an investment

What are the three domestic sectors of the economy?

government, households, and firms

Government transfer payments include all of the following except _____.

wage payments to police officer

Net private domestic investment is defined as ______.

what is left over from total new private investment after depreciation

Inflows of disposable income and outflows of consumption spending and saving take place ______, while inflows of revenue from taxes and outflows in the form of purchases and transfers take place ______.

within households; within government

A country's exports are included in GDP when the goods and services are ______.

within the borders

Compensation to ______ is the largest share of national income.

workers

What is a final good?

A good that is counted as part of GDP A good directly consumed by individuals or businesses

intermediate

A good used only in the production of other products

Using the expenditure approach, which of the following most closely defines the composition of GDP?

C + Ig + G + X − M

Government consumption expenditures and gross investment include which of the following?

Direct purchases of resources Expenditures on final goods

What creates a problem in using money to value GDP?

inflation

The use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because ______ changes.

the value of money itself

Aggregate output is the primary measure of the economy's

total output of goods and services

Social Security payments, welfare payments, and veterans' payments that the government makes directly to households are called government public blank payments

transfer

GDP only counts final goods and services to avoid multiple counting of goods. true or false

true

Interest is the price that borrowers pay to a lender so that they can purchase goods and services today rather than in the future. true or false

true

Retained earnings are defined as ______ profits.

undistributed corporate

The sale of ______ goods is excluded from the calculation of GDP because they contribute nothing to current production.

used

The real-world, more complex GDP price index used in the United States is called the chain-type annual blank price index

weights

If the nominal GDP of an economy is equal to $140 and the price index is equal to 200, then real GDP of the economy would be equal to ______.

70

What is the agency that compiles statistics about the economy?

Bureau of Economic Analysis

Select all of the benefits of national income accounting.

Enables formulation of policies to improve or safeguard the economy's health Tracks the long-run course of the economy Assesses the health of the economy

Which of the following are part of taxes on production and imports?

Excise taxes Business property taxes Customs duties General sales taxes License fees

In general, GDP includes unpaid work.

False

Household

Has an inflow of disposable income and outflows of consumption spending and savings

Government

Has an inflow of revenue from various types of taxes and an outflow of disbursements in the form of purchases and transfers

Business

Has inflows from three major sources of funds for investment and an outflow of investment expenditures

is the price that is paid for the use of borrowed money.

Interest

Why is residential construction considered an investment rather than consumption?

It generates a future flow of output in the form of housing services.

What enables economists to track the long-run course of the economy?

National income accounting

Which of the following measures the economy's overall performance?

National income accounting

Which of the following are included in compensation of employees?

Payments by employers into private pension plans for employees Wages and salaries Payments by employers into social insurance for employees

What are noneconomic sources of well-being that are not considered in a country's GDP?

Reduction of drug and alcohol abuse Reduction of crime Peaceful international relations

Why are sales of secondhand goods are excluded from the calculation of GDP?

They do not contribute to current production.

Why do economists compare the individual outputs in dollars rather than the number of units produced each year?

To show that aggregate output has increased

GDP reveals nothing about the way output is distributed. true or false

True

Among the three domestic sectors of the economy, the government has inflow from taxes, whereas blank have inflows from investment.

business

f net investment is negative, the capital stock has ______. If net investment is positive, the capital stock has ______.

decreased, increased

When prices rise, economists ______ GDP.

deflate

In order to avoid the problems created by using money values to measure GDP, economists ______ GDP when prices rise and ______ GDP when prices fall. Multiple choice question. inflate; deflate

deflate, inflate

In the circular flow diagram, firms ______ inputs, and households ______ goods and services.

demand, demand

Which of the following is not a category when using the national income approach to calculating GDP?

depreciation of income

Because GDP is used by economists to compare dissimilar items using a common unit of measurement, the GDP is measured in ______.

dollars

What are the three categories of personal consumption expenditures?

durable, non durable, services

We measure gross domestic product by multiplying the quantities of goods by their prices because it allows us to ______.

express the values of products in a common unit of measurement

Unlike final goods, intermediate goods are included in the calculation of GDP. True or false

false

Consumers are free to divide their income between saving and investment. true or false

false real answer: consumption and saving

Consumption goods, capital goods and services purchased by their ultimate users are called ______ goods.

final

In order to determine GDP using the expenditures approach, all spending on ______ goods and services, not intermediate goods, is added up.

final

______ goods are included in the calculation of GDP, while ______ goods are not included.

final, intermediate

The market value of all final goods and services produced within the borders of a given country during a given period of time is the definition of ______.

gross domestic product

Residential construction is counted as ______.

gross private domestic investment

Which of the following are the domestic sectors of the U.S. economy?

households, governments and business

Foreign goods or ______ purchased by consumers, firms, or the government should be subtracted from GDP because the goods were not produced in the United States.

imports

Net exports equals exports minus

imports

Nominal GDP measures the value of all goods and services ____.

in dollars of the GDP year

National blank accounting is the measure of the overall performance of the economy

income

What happens to the size of the capital stock when gross investment and depreciation are equal?

it stays the same

National income accountants add indirect business taxes to wages, rent, interest, and profits in order to ______.

keep track of expenditures that are diverted to the government

When gross investment is ______ depreciation, net investment is negative.

less than

Economists compare the ______ value of the total output in various years rather than ______ volumes of production.

market, actual

All the income that is earned from American-owned resources is called ______.

national income

Income earned through the use of American-owned resources for services and production is called ______ income.

national income

What do economists use to calculate GDP under the income approach?

national income

Disinvesting (when the economy is using up more capital than it is producing) is one effect of ______ net investment.

negative

In calculating gross private domestic investment, a ______ change in ______ must be subtracted from the total investment for that particular year.

negative, inventories

The view that GDP is the sum of money spent on buying final goods and services is called the aggregate blank approach

output

All income received by households, whether earned or unearned, is called blank income

personal

The term that covers all expenditures by households on goods and services is known as blank blank expenditures

personal consumption

Which type of expenditure makes up more than 50% of U.S. GDP?

personal consumption

Disposable income equals ______.

personal income minus personal taxes

A(n) blank blank is a measure of a specified collection of goods and services in a given year as compared to the value of a highly similar collection of goods and services in a reference year.

price index

is the income received by households and businesses that supply property resources.

rent

More abundant leisure increases ______, but it ______ real GDP.

social welfare, decreases

In order to account for expenditures that are diverted to the government, national income accountants add blank on production and imports to wages, rent, interest, and profits.

taxes