Chapter 8: GDP: Measuring Total Production and Income

Profits

A component of gross domestic income that refers to the excess of revenues minus expenses of sole proprietorships (small businesses) and corporations.

Interest

A component of gross domestic income that refers to the net interest received by households, or the difference between the interest received on savings accounts, government bonds, and other investments and the interest paid on car loans, home mortgages, and other debts.

Rent

A component of gross domestic income that refers to the payments, made for the use of land or buildings, received by households.

Final Good or Service

A good or service purchased by a final user.

Intermediate Good or Service

A good or service that is an input into another food or service, such as a tire on a truck.

Price Level

A measure of the average prices of goods and services in the economy.

GDP Deflator

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

Y = C + I + G + NX

A simple equation that sums up the components of GDP is __________.

Business Cycle

Alternating periods of economic expansion and economic recession.

Equal To

Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP? In the base year, nominal GDP is __________ real GDP.

Greater Than

Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP? In years after the base year, nominal GDP is __________ real GDP.

Less Than

Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP? In years prior to the base year, nominal GDP is __________ real GDP.

Underground Economy

Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

$6,680

Consider the following simple economy that produces only three goods: 2009 (Base Year) DENIM PANTS Qty: 80 Price: $40 WINE Qty: 90 Price: $11 TEXTBOOKS Qty: 15 Price: $90 2017 DENIM PANTS Qty: 100 Price: $50 WINE Qty: 80 Price: $10 TEXTBOOKS Qty: 20 Price: $100 Real GDP in 2017 equals __________.

Stock Purchases

Consider the following statement: "In years when people buy many shares of stock, investment will be high and, therefore, so will gross domestic product (GDP)." This statement is inaccurate. Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not ___________.

D. All of the above.

Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being? A. The costs of pollution are not included. B. The value of leisure is not included. C. GDP does not include crime rates or income distribution. D. All of the above.

Household Production

Refers to goods and services people produce for themselves. For example, the services a homemaker provides to the homemaker's family.

Government Purchases

Spending by federal, state, and local governments on goods and services.

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses.

Consumption

Spending by households on goods and services, not including spending on new houses.

Net Exports

Exports minus imports.

Gross Domestic Income

GDP calculated as the sum of income payments to households. It is divided among wages, interest, rent, profits, and certain non-income items.

Imperfect Measurement

GDP is an __________ of total production in the economy because it does not include household production or production from the underground economy.

GDP Per Capita

GDP per person. __________ is calculated by dividing the value of GDP for a country by the country's population.

Statistical Discrepency

Gross domestic income is not measured precisely because it includes, among other things, an allowance for measurement problems called the statistical discrepancy.

Circular Flow

In the __________ of expenditure and income, the total value of production in an economy must equal the total value of income. The reason why is because every penny spent on a good or service must end up as someone's income.

Transfer Payments

Payments by the government to households for which the government to households for which the government does not receive a new good or service in return.

C. RGDP < NGDP because prices are rising.

Suppose the base year is 2001. Looking at GDP from the United States from 2001 to the present, what would be true of the relationship between nominal GDP and real GDP? A. RGDP = NGDP because prices are stable. B. RGDP > NGDP because prices are falling. C. RGDP < NGDP because prices are rising. D. The relationship is uncertain without more information on prices.

Growth Rate

The (annual) __________of real GDP in a year can be determined by the following: [Real GDP (Subsequent Year) - Real GDP (Previous Year)] / Real GDP (Previous Year) x 100 = X

Non-Income Items

The __________ are included in gross domestic income sales taxes, depreciation, and a few other items are included in the value of goods and services produced but not directly received by households as income.

Economic Growth

The ability of an economy to produce increasing quantities of goods and services.

20 and 37

The following list illustrates the value added approach to calculating GDP. Please complete the list. VALUE OF PRODUCT + A cotton farmer sells raw cotton for $3. + A textile mill sells cotton woven into cotton fabric for $5. + A shirt company sells fabric made into a shirt for $17. + L.L. Bean sells a shirt on its website for $37. VALUE ADDED BY + The common farmer = 3. + The textile mill = 2. + The shirt company = 12. + L.L. Bean = __________. Total Value Added __________.

Expenditure (GDP)

The four major categories of __________ (GDP) are consumption, investment, government purchases, and net exports.

Wages

The largest component of gross domestic income is __________.

Value Added

The market value a firm adds to a product.

Gross Domestic Product (GDP)

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

Inflation Rate

The percentage increase in the price level from one year to the next.

Recession

The period of a business cycle during which total production and total employment are decreasing.

Expansion

The period of a business cycle during which total production and total employment are increasing.

Final Good

The purchase of a new fleet of police cars by the local government is the purchase of a (intermediate good/final good) __________.

Intermediate Good

The purchase of steel from a steel mill by an automobile manufacturer is the purchase of a (intermediate good/final good) __________.

Microeconomics

The study of how how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Real GDP

The value of final goods and services evaluated at base-year prices.

Nominal GDP

The value of final goods and services evaluated at current-year prices.

Personal Income

_________ is equal to national income minus retained corporate earnings plus government transfer payments and interest on government bonds.

National Income

__________ is equal to GDP minus depreciation.

Disposal Personal Income

__________ is equal to personal income minus personal taxes, such as the personal federal income tax. It is the best measure of the income households actually have available to spend.

Gross National Product (GNP)

__________ is the value of final goods and services produced by residents of the United States, even if the production takes place outside of the United States.