DC Eco_2

An example of rent seeking would be

a domestic industry group using resources to try to block imports.

Rent seeking is

an appeal to the government for special benefits at the taxpayers' or someone else's expense.

net exports

are a country's exports of goods and services less its imports of goods and services.

Rent seeking is different from profit maximization because rent seeking

attempts to increase profit by influencing the political process.

Which of the following are included in this year's GDP? Explain your answer in each case

*Interest received on an AT&T corporate bond. Income received by the bondholder for the services derived by the corporation for the loan of money. *Income of a dentist from the dental services provided. Payment for a final service. You cannot pass on a tooth extraction! *The publication and sale of a new college textbook. It is a new good produced for final consumption * A $2 billion increase in business inventories. The increase in inventories could only occur as a result of increased production.

Which of the following are excluded in this year's GDP? Explain your answer in each case

*Social Security payments received by a retired factory worker. A transfer payment from taxpayers for which no service is rendered (in this year). *Unpaid services of a family member in painting the family home. Nonmarket production *A monthly allowance a college student receives from home. A private transfer payment; simply a transfer of income from one private individual to another for which no transaction in the market occurs. * Money received by Josh when he resells his nearly brand-new Honda automobile to Kim. The production of the car had already been counted at the time of the initial sale. *An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no reduction in pay. The effect of the decline will be counted, but the change in the workweek itself is not the production of a final good or service or a payment for work done. *The purchase of 100 shares of Google common stock. Merely the transfer of ownership of existing financial assets. (pg.6)

To an economist, a coercive government can be useful in order to:

-Reallocate resources in order to improve efficiency -Fight negative externalities -Provide a low-risk economic environment for individuals and firms

What is the GDP price index and what is its role in differentiating nominal GDP and real GDP?

A price index is a measure of the price of a specified collection of goods and services, called a "market basket," in a given year as compared to the price of an identical (or highly similar) collection of goods and services in a reference year. To find real GDP we divide the nominal GDP by this price index.

Jean-Baptiste Colbert was the Minister of Finance under King Louis XIV of France. He famously observed, "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing." How does his comment relate to special interests and the collective-action problem?

A smaller group will be more active in seeking significant group gains than a larger group who faces small losses at the individual level.

Why are changes in inventories included as part of investment spending?

Anything produced by business that has not been sold during the accounting period is something in which business has invested—even if the "investment" is involuntary, as often is the case with inventories. But all inventories in the hands of business are expected eventually to be used by business—for instance, a pile of bricks for extending a factory building—or to be sold

Explain how net exports might be a negative amount.

Consider the following values. If American exports are $7 billion and imports are $5 billion, then American net exports are +$2 billion. If the figures are reversed, so that Americans export $5 billion and import $7 billion, then net exports are -$2 billion—a negative amount. Thus, if Americans import more goods and services than they export then net exports will be a negative amount.

If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate?

Depreciation is the value of all the physical capital—machines, equipment, buildings—used up in producing the year's output. Since net domestic product is gross domestic product less depreciation, in determining net domestic product through the expenditures approach it would be appropriate to use the net investment measure that excludes depreciation, that is, net private domestic investment.

Explain why an economy's output, in essence, is also its income.

Everything that is produced is sold, even if the "selling," in the case of inventory, is to the producing firm itself

What is the difference between gross private domestic investment and net private domestic investment?

Gross private domestic investment less depreciation is net private domestic investment.

In what ways are national income statistics useful?

National income accounting does for the economy as a whole what private accounting does for businesses. Firms measure income and expenditures to assess their economic health.

Contrast the ideas of nominal GDP and real GDP.

Nominal GDP is a measure of the market or money value of all final goods and services produced by the economy in a given year. We use money or nominal values as a common denominator in order to sum that heterogeneous output into a meaningful total. The question then arises, how can we compare the market values of GDP from year to year if the value of money itself changes in response to inflation (rising prices) or deflation (falling prices)?

Explain how U.S. exports and imports each affects domestic production. How are net exports determined?

The United States' exports are as much a part of the nation's production as are the expenditures of its own consumers on goods and services made in the United States. Therefore, the United States' exports must be counted as part of GDP. On the other hand, imports, being produced in foreign countries, are part of those countries' GDPs. When Americans buy imports, these expenditures must be subtracted from the United States' GDP, for these expenditures are not made on the United States' production.

Why is one more reliable than the other for comparing changes in the standard of living over a series of years?

The answer is to adjust nominal GDP to take into account potential changes in prices. This results in real GDP, where nominal GDP has been deflated or inflated to reflect changes in the price level (also called adjusted GDP). Obviously we will want to use real GDP to compare standards of living over time. Individuals are concerned about the amount of actual goods consumed rather than the nominal value of the goods. Would you prefer to have two candy bars priced a $1.00 or one candy bar priced at $2.00? Both have the same nominal value of consumption!

Why do economists include only final goods and services in measuring GDP for a particular year? Why don't they include the value of the stocks and bonds bought and sold? Why don't they include the value of the used furniture bought and sold?

The dollar value of final goods includes the dollar value of intermediate goods. If intermediate goods were counted, then multiple counting would occur. The value of steel (intermediate good) used in autos is included in the price of the auto (the final product). This value is not

occur when politicians commit to making a series of future expenditures without simultaneously committing to collect enough tax revenues to pay for those expenditures

Unfunded liabilities

Explain: "Though net investment can be positive, negative, or zero, it is impossible for gross investment to be less than zero"

When gross investment exceeds depreciation, net investment is positive and production capacity expands; the economy ends the year with more physical capital than it started with. When gross investment equals depreciation, net investment is zero and production capacity is said to be static; the economy ends the year with the same amount of physical capital. When depreciation exceeds gross investment, net investment is negative and production capacity declines; the economy ends the year with less physical capital.

To an economist, a government program is too big if an analysis of that program finds that MB is _____MC.

less than correct

"Logrolling" could be occurring if

one group of legislators helps another with the understanding that at some point in the future they, in turn, will be helped.

Consider: "Politicians would make more rational economic decisions if they weren't running for reelection every few years." This statement recognizes that

political officeholders who must seek voter support will favor programs with short-term benefits and reject programs with long-term benefits

Durable goods

products that have expected lives of three years or more. Examples are refrigerators, new cars etc.

Nondurable goods

products with less than three years of expected life. Examples are peanut butter, clothes, etc.

The problem of limited and bundled choice in the political process tends to

reduce economic efficiency because a politician chooses programs with positive and negative net benefits.

Elected officials often accommodate rent-seeking behavior, particularly by firms, unions, and professional groups located in their home states, because these groups

support the elected officials with financial and non-financial resources.

Public bureaucracies are possibly less efficient than business firms because

the private market is driven by profit, but this competitive force does not operate in public bureaucracies.

the concept of pork-barrel politics is illustrated by

the purchasing of unsolicited military equipment.

Services

the work done by lawyers, accountants, etc.