Macro econ chapter 8
Indicate whether each of the following transactions represents the purchase of a final good
1. The purchase of cotton fabriccotton fabric from a textile milla textile mill by a clothing companya clothing company. Is not the purchase of a final good 2. The purchase of a new fleet of police carsa new fleet of police cars by the locallocal government. Is the purchase of a final good 3. The purchase of domesticdomestic wine by a FrenchFrench consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good
Indicate whether each of the following transactions represents the purchase of a final good
1. The purchase of wheatwheat from a wheat farmera wheat farmer by a bakerya bakery. Is not the purchase of a final good 2. The purchase of a new fire trucka new fire truck by the locallocal government. Is the purchase of a final good 3. The purchase of domesticdomestic wine by a FrenchFrench consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good
Data from United Nations Development Programme, "The Human Development Index," (http://hdr.undp.org/en/statistics/hdi/). Why are there differences between the two lists?
A. GNI is not adjusted for pollution or other negative effects of production. B. GNI is not adjusted for crime or other social problems. C. The value of leisure is not included in GNI. D. GNI does not account for income distribution.
Think about the increase in spending for the Department of Homeland Security and the wars in Afghanistan and Iraq. These all represent government expenditures that have increased GDP yet the typical person might not necessarily be better off as a result. Why?
A. The value of leisure is not included in GDP. B. GDP is not adjusted for crime or other social problems. C. GDP is not adjusted for pollution or other negative effects of production. D. GDP does not account for income distribution.
Why in microeconomics LOADING... can we measure production in terms of quantity, but in macroeconomics LOADING... we measure production in terms of market value?
A. If, in macroeconomics, we measured production using quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by Apple, to gallons of milk, and so on. B. When we measure total production, we can't just add together the quantities of every good and service because the result would be meaningless. C. Measuring production using market value in dollar terms allows us to add together many different goods and services.
U.S. Gross National Product (GNP) differs from U.S. Gross Domestic Product (GDP) in which of the following ways? (Mark all that apply.)
C. GNP considers production that occurs outside the U.S. This is the correct answer.D. GNP is the value of final goods and services produced by residents of the U.S. In the United States, the difference between GNP and GDP is smaller than that of many other countries.0
The figure above shows the values of the components of GDP for the year 20062006. Based on the data shown, which of the following statements regarding the components of GDP are false?
Consumer spending on services is less than the sum of spending on durable and nondurable goods.
Indicate whether you agree or disagree with the following statements. "If nominal GDP is less than real GDP, then the price level must have fallen during the year." "Whenever real GDP LOADING... declines, nominal GDP LOADING... must also decline." "If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline." "If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."
Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
Indicate whether you agree or disagree with the following statements. "If nominal GDP is less than real GDP, then the price level must have fallen during the year." "Whenever real GDP LOADING... declines, nominal GDP LOADING... must also decline." "If a recession is so severe that the price level declines, then we know that both real GDP and nominal GDP must decline." "If real GDP stayed the same while nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined."
Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. Agree. If both output and prices are falling, then both real GDP and nominal GDP will fall. Agree. If nominal GDP declined between 2008 and 2009, then the GDP deflator must also have declined.
If you were attempting to forecast the level of consumer spending by households, which measure of total production or total income might be most helpful in making your forecast?
Disposable personal income
In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?
Every penny spent on a good or service must end up as someone's income.
In the U.S., gross domestic product (GDP LOADING... ) and gross national product (GNP LOADING... ) are close in value. Under what circumstances would GNP be much larger than GDP?
Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S. Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad.
How is the GDP deflator calculated?
GDP deflator = Nominal GDP/Real GDP x 100
All of the following are correct except Which component of gross domestic income is the largest?
Gross domestic income does not include health insurance benefits received by the employees. wages
GDP is an imperfect measure of economic well-being because it fails to measure what types of production? Even if GDP included these types of production, why would it still be an imperfect measure of economic well-being?
Household production and the underground economy. A. GDP is not adjusted for crime or other social problems. B. GDP is not adjusted for pollution and it does not account for unequal income distribution. C. The value of leisure is not included in GDP.
Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spent on household production. Source: Michael Burda and Daniel S. Hamermesh, "Unemployment and Household Production," National Bureau of Economic Research working paper 14676, January 2009. Based on these findings, what can we predict about total productionlong dash—whether or not that production is included in the calculation of GDPlong dash—in the economy when these workers became unemployed?
If the workers had been paying other people to perform the household activities prior to unemployment, then total production will fall.
A report of the World Bank, an international organization devoted to increasing economic growth in developing countries, includes the following statement: "Informal economic activities pose a particular measurement problem [in calculating GDP], especially in developing countries, where much economic activity may go unrecorded." Source: The World Bank, World Development Indicators, Washington DC: The World Bank, 2003, p.189. What does the World Bank mean by "informal economic activities"? Why do these activities make it harder to measure GDP and, as a result, the standard of living?
In many developing countries, informal economic activities refer to activities in the underground economy. If a large portion of an economy's production is done in the underground economy, measured GDP will underestimate production and economic well-being.
Suppose the amount the federal government collects in personal income taxes decreasesdecreases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income?
National income will remain the same . Personal income will remain the same . Disposable personal income will increase
Suppose a house is built and sold in the year 2006. If the house is resold in the year 2015, is the value of the house included in Gross Domestic Product LOADING... (GDP) for 2015? Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2015?
No. GDP for 2015 includes only production that occurs during 2015. Yes. GDP for 2015 includes the market value of final goods and services. This includes real estate services.
For the total value of expenditures on final goods and services LOADING... to equal the total value of income generated from producing those final goods and services, all the money that a business receives from the sale of its product must be paid out as income to the owners of the factors of production. How can a business make a profit if it pays out as income all the money it receives?
Profit is the income that remains after a firm has paid wages, rent, and interest.
Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the present, what would be true of the relationship between nominal GDP and real GDP
RGDP < NGDP because prices are rising.
We often use real GDP per capita LOADING... as a measure of a country's well-being. Review the definition of real GDP per capita before answering the following question. Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic well-being?
The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.
An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last year, she purchased $6 comma 0006,000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for $900900 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of $1 comma 1001,100 each.
The total value added LOADING... of the art dealerart dealer is $ 2000
What is the difference between the value of a firm's final product and the value added by the firm to the final product?
The value of a firm's final product is the sale price; value added is the difference between the sale price and the price of intermediate goods.
Real GDP
The value of final goods and services evaluated at base-year prices. It is calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years. PrintDone
Why does inflation make nominal GDP LOADING... a poor measure of the increase in total production from one year to the next? How does real GDP LOADING... deal with the problem inflation causes with nominal GDP?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities. A. Real GDP separates price changes from quantity changes. B. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced. C. Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years.
Which equation represents the relationship between GDP and the four major expenditure components? What are the four major components of expenditures in GDP?
Y=C+I+G+NX Consumption, Investment, Government Purchases, and Net Exports
Is the value of intermediate goods and services LOADING... produced during the year included in Gross Domestic Product LOADING... (GDP)? For example, is aluminumaluminum used to produce a new mountain bikemountain bike included in GDP? (Note that this question does not ask whether aluminumaluminum is directly counted in GDP but rather whether the production is included in GDP.
Yes. The value of the aluminumaluminum is not directly counted in GDP, but the production of aluminumaluminum is included in the value-added method of measuring GDP.
Final good
a good or service purchased by a final user
Assuming that inflation has occurred over time, what is the relationship between nominal GDP LOADING... and real GDP LOADING... in each of the following situations?
a. In years after the base year, nominal GDP is greater than real GDP. b. In the base year, nominal GDP is equal to real GDP. c. In years prior to the base year, nominal GDP is less than real GDP.
Which of the following are likely to increase the measured level of GDP LOADING... and which are likely to reduce it
a. When the number of people working outside the home increasesincreases, the measured level of GDP increases . b. When there is a sharp decreasedecrease in the crime rate, the measured level of GDP may increase or decrease . c. If lowerlower tax rates cause fewerfewer people to hide the income they earn, the measured GDP increases .
Which of the following are likely to increase the measured level of GDP LOADING... and which are likely to reduce it?
a. When the number of people working outside the home increasesincreases, the measured level of GDP increases . b. When there is a sharp increaseincrease in the crime rate, the measured level of GDP may increase or decrease . c. If higherhigher tax rates cause moremore people to hide the income they earn, the measured GDP decreases .
Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company.
a. You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption Expenditure b. You purchase a 2011 (preowned) Ford Escape Hybrid from a friend. Not included in GDP calculation c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. Not included in GDP calculation d. Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car dealer in Shanghai, China. Net Export Expenditure e. Ford purchases new machine tools to use in its Missouri Escape factory. Investment Expenditure f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant. Government Expenditure
An underground economy involves all of the following except Some countries have larger underground economies than do other countries, because
buying and selling of goods and services by obtaining a permit from the government. of government policies that are retarding economic growth.
An article on USAToday.com observed: "Consumer spending, once the driving force of the U.S. economy, is likely to remain stagnant for years as households struggle to cut debt and build up savings, economists say." Source: Karina Frayter, "Economists: Consumers Won't Save the Economy," USAToday.com, October 2, 2011. The cutting of debt and building up of savings If consumer spending remains stagnant, the economy
has reduced consumer spending and further slowed down the economic recovery in the short run. will most likely remain sluggish.
The movie Avatar overtook Titanic to become the highest-grossing movie of all time. An article on Forbes.com notes that "the average ticket price in 2008 (Avatar was released in 2009) was $7.18, up 56% from prices in 1997 when Titanic was in theaters." The article states that "A look at domestic grosses (box-office receipts) adjusted for inflation shows a more realistic view of Avatar's performance." Source: Dorthy Pomerantz, "Is Avatar Really King of the Box Office?" Forbes.com, January 27, 2010. Adjusting for inflation shows a more realistic view of Avatar's performance at the box office since A more accurate measure of how well a movie has performed at the box office would be Newspapers do not report the number of tickets sold The comparison of the total number of tickets sold by all movies in 1939 with the total number of tickets sold by all movies in 2011
it shows the increase in ticket prices in constant dollars. the inflation adjusted dollar value of tickets sold. since the dollar value of tickets sold is a better measure. will not be a good way to measure how the relative importance of movies in the economy has changed over time.
Economic historians Roger Ransom and Richard Sutch have estimated that African-American farmers in the U.S. South after the Civil War worked about 30 percent fewer hours per year than they had as slaves before the Civil War. If after the Civil War, African-American farmers had continued to work these additional hours, their production and income would have been higher and so would have been U.S. GDP. Source: Roger L. Ransom and Richard Sutch, One Kind of Freedom: The Economic Consequences of Emancipation, Second edition, New York: Cambridge University Press, 2001. The farmers' well-being After the Civil War, U.S. GDP
would not have been higher as a result of working these additional hours because value of an individual's well-being is not included in GDP calculation. could have been higher if the farmers did not reduce their work hours.
Indicate whether you agree or disagree with the following statement: "In years when people buy manymany shares of stock, investment will be highhigh and, therefore, so will gross domestic product LOADING... (GDP)."
Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.
How does the size of a country's GDP affect the quality of life of the country's people?
Generally, the more goods and services people have, the better off they are.
Indicate whether the following statement is correct or incorrect. "Corporate profits are much too high: Most corporations make profits equal to 50 percent of the price of the products they sell."
Incorrect: The largest component of gross domestic income is wages, which are about three times as large as profit.
If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?
Larger: The value of all goods and services sold would include intermediate goods.