ECN 1B Chapter 5

What does C represent in GDP equation?

Consumption

If your grandparents buy a new retirement home, this transaction would affect

Investment

What does I represent in GDP equation?

Investments

What is Net Exports?

The value of goods and services produced domestically and sold abroad minus the value of goods and services produced abroad and sold domestically.

What is the GDP equation?

Y=C+I+G+NX

Which of the following would be excluded from 2016 GDP? The sale of

a home built in 2015 and first sold in 2016.

U.S. GDP would exclude which of the following?

cotton purchased by Lee Jeans

The value of plant and equipment worn out in the process of manufacturing goods and services is measured by

depreciation.

Gross domestic product is the sum of the market value of the

final goods and services.

An example of a transfer payment is

unemployment benefits.

What does GDP include?

• All items produced in the economy and sold legally in markets •Tangible and Intangible goods • Only new items

What does GDP exclude?

• Household production (cooking, mowing lawn - b/c people don't buy these in the markets) • Underground production (wages/tips "not on the books") • Leisure time • Environment quality (lowers the standard of living but not measured by GDP) • Most items produced and sold illicity • Illegal drugs • Items produced and consumed at home • Vegetables you grow in your garden

If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500 worth of shoes to consumers, the contribution to GDP is

$500

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here?

$80

Write down Inflation Rate Formula

((GDP Deflator in Year 2) - (GDP Deflator in Year 1)) / (GDP Deflator in Year 1) * 100%

Write down GDP Deflator Formula

(Nominal GDP / Real GDP) *100

Write down Real GDP Formula

(Units of Output x Base Year Price per Unit) +(Units of Output x Base Year Price per Unit)

Write down Nominal GDP Formula

(Units of Output x Price per Unit) + (Units of Output x Price per Unit)

If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as ________ hamburgers.

15 $2(30 hot dogs) = $60 $60/$4 per hamburger = 15 hamburgers

GDP would include which of the following?

Consulting Services

Which is the largest component of GDP?

Consumption

How is your purchase of a $40,000 BMW automobile that was produced entirely in Germany recorded in the U.S. GDP accounts?

Consumption increases by $40,000, and net exports decrease by $40,000.

A new car produced in 2015, but first sold in 2016, should be counted in 2016 GDP because that is when it was first sold as a final good.

False

If nominal GDP in 2016 exceeds nominal GDP in 2015, real output must have risen.

False

If the lumberyard sells $1,000 of lumber to a carpenter and the carpenter uses the lumber to build a garage that he sells for $5,000, the contribution to GDP is $6,000.

False

In the United States, investment is the largest component of GDP

False

Net national product always exceeds a nation's GNP because of depreciation.

False

The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.

False

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.

False

When the city of Chicago purchases a new school building, the investment component of GDP increases.

False

What does G represent in GDP equation?

Government Spendings

Is GDP a good measure of economic well-being?

It is good but not perfect because excludes leisire and the value of a clean environment. Yes, because GDP uses market prices to value goods and services, it excludes the value of almost all activity that takes place outside the market. Measures our ability to obtain many of the inputs for a worthwhile life. People prefer higher to lower incomes.

What is GDP Deflator?

Measures the level of prices in the economy Calculated from the ratio of nominal to real GDP

What does NX represent in GDP equation?

Net Exports = Exports - Imports

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction?

Net exports fall, while GDP is unchanged.

If all quantities produced rise by 10 percent, and all prices fall by 10 percent, which of the following occurs?

Real GDP rises by 10 percent, while nominal GDP is unchanged.

What is Investment?

Spending on business capital, residential capital, and inventories

What is Government Purchases?

Spending on goods and services by local, state, and federal government

What are Consumptions?

Spendings on good and services by household, with the exception of purchases of new housing.

What happens if total spending rises from one year to the next?

The economy is producing a larger output of goods and services Goods and services are being sold at higher price

Which of the following does NOT add to U.S. gross domestic product?

The federal government sends a Social Security check to your grandmother.

What does GDP measure?

The total income of everyone in the economy The total expenditure on the economy's output of goods and services

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person

True

A recession occurs when real GDP declines.

True

Cigarettes should be valued in GDP at $5.50 per pack even though $1.00 of that price is tax because the buyers paid $5.50 per pack.

True

Depreciation is the value of the wear and tear on the economy's equipment and structures.

True

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.

True

If U.S. GDP exceeds U.S. GNP, then foreigners produce more in the United States than U.S. citizens produce in the rest of the world

True

Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output.

True

What is Real GDP?

Uses constant base-year prices to value the economy's production of goods and services Shows how economy overall production of goods and services changes over time

What is Nominal GDP?

Uses current prices to value the economy's production of goods and services

Real GDP is measured in _______ prices while nominal GDP is measured in _________ prices.

base year; current year

Gross domestic product can be measured as the sum of

consumption, investment, government purchases, and net exports.

If U.S. GDP exceeds U.S. GNP, then

foreigners are producing more in the United States than Americans are producing in foreign countries.

If nominal GDP in 2016 exceeds nominal GDP in 2015, then the production of output must have

risen or fallen because there is not enough information to determine what happened to real output.

U.S. gross domestic product (in contrast to gross national product) measures the production and income of

the domestic service sector only.

What is GDP?

the market value of all final goods and services produced within a country in a given period of time