chapter 11: Gross Domestic Product

review questions: A small economy produced the following final goods and services during a given month: 3 million pounds of food, 50,000 shirts, 20 houses, 50,000 hours of medical services, 1 automobile plant, and 2 tanks. Calculate the value of this output at the following market prices. $1 per pound of food. $20 per shirt. $50,000 per house. $20 per hour of medical services. $1 million per automobile plant. $500,000 per tank.

TOTAL VALUE= $8 MILLION

review questions: Which of the following are final goods or services' and which are intermediate goods or services? a. A haircut purchased from a hair salon b. A new automobile. c. An oil filter purchased in a new automobile. d. Crude oil.

a. A haircut purchased from a hair salon - Final service b. A new automobile. - Final good c. An oil filter purchased in a new automobile. - Intermediate good d. Crude oil. - Intermediate good

practice quiz: The expenditure approach for the calculation of GDP includes spending on

consumption, gross private domestic investment, government spending for goods and services, and net exports

practice quiz: Which national income account should be examined to discover trends in the after-tax income that people have to save and spend? a. Gross domestic product (GDP)' b. Gross national product (GNP). c. National income (NI) d. Disposable personal income (DI)

d. Disposable personal income (DI)

practice quiz: Which of the following is included in personal income but not in national income? a. Compensation for workers. b. Proprietors' income. c. Corporate profits. d. Social Security payments.

d. Social Security payments.

practice quiz: National income (NI) id calculated by adjusting GDP for

depreciation

practice quiz: Which of the following items is included in the calculation of GDP? a. Purchase of 100 shares of Apple stock. b. Purchase of a used car. c. The value of a homemaker's services. d. Sale of Gulf \War military surplus. e.None of the above would be included.

e.None of the above would be included

practice quiz: Gross domestic product is official measured by adding together the...

market value of all final goods and services produced within the border of a nation

Nominal GDP

measures all final goods and services produced in a given time period, valued at the prices existing during the time period of production

Real GDP

measures all final goods and services produced in a given time period, valued at the prices existing in a base year

practice quiz: The income that people earn in resources or factor markets is called...

national income

practice quiz: Gross domestic product (GDP) includes

only final goods and services

practice quiz: the largest component of GDP is

personal consumption expenditures

practice quiz: Based on the circular flow model, money flows from households to businesses in..

product markets

practice quiz: increased production, but not increased inflation, will result in higher..

real GDP

practice quiz: If the underground economy is sizable, then GDP will...

understate the economy's performance

review questions: An economy produces final goods and services with a market value of $5,000 billion in a given year, but only $4,500 billion worth of goods and services is sold to domestic or foreign buyers. Is this nation's GDP $5,000 billion or $4,500 billion? Explain your answer.

$4,500 billion dollars for X ( Because we produce and buy the goods and services for foreign buyers this mean we export for other countries ) , $500 billion dollars for C ( The buyers consume in the this country ) => GDP = $ 5000 billion dollars

review questions: Explain why a new forklift sold for use in a warehouse is a final good even though it is fixed investment (capital) used to produce other goods. Is there a double-counting problem if this sale is added to GDP?

Capital is not excluded from being a final good. A final good is a finished good purchased by an ultimate user and not for resale. The ultimate user is the warehouse, so the sale would be included in GDP and there would be no double counting problem.

practice quiz: The most broadly based price index is the..

GDP chain price index

Final Goods

GDP is the market value of all final goods produced in the United States during a period of time, regardless of who owns the factors of production. Secondhand and financial transactions are not counted in GDP.

practice quiz: all final goods and services that make up GDP can be expressed in the form

GDP:C+I+G+(X-M).

practice quiz: The equation for determining real GDP for year X is:

Nominal GDP for year X/GDP chain index for year X x 100

review questions: Using the basic circular flow model, explain why the value of businesses' output of goods and services equals the income of households.

On the circular flow model, it is assumed that what the business firms produced is consumed entirely by the household. The purchasing power of the households is limited by the amount of income. This principle equates the output of goods and services to the income of households.

Disposable Personal Income (DI)

Personal income minus personal taxes. DI is the amount of income a household has available to consume or save.

Intermediate Goods

To avoid double counting, GDP also does not include intermediate goods GDP is calculated by the expenditure approach

review questions: Explain how net exports affect the U.S. economy. Describe both positive and negative impacts on GDP. Why do national income accountants use net exports to compute GDP, rather than simply adding exports to the other expenditure components of GDP?

Using the expense approach, it would be consumption+investment+government+net exports. So, this would be 2,966+716+924+427-547= 4,486. Using the income approach, it would be corporate profits + depreciation + compensation of employees + rental income + indirect business taxes + proprietors income So, this would be 305+479+2648+19+370+328=4,149

review questions: Explain why the government spending (G) component of GDP falls short of actual government expenditures.

When you are computing GDP, you are trying to calculate the total value of goods and services produced by an economy, in a specified period of time, usually the current year. These goods do not include transfer payments, or interest on the government debt, which is what much of government spending constitutes. Transfer payments are SSI, medicare, food stamps etc. Thus, the G component is calculating, the amount of ships, airplanes, and services government employees provide, etc

GDP Chain Price Index

a broad price index used to convert nominal GDP to real GDP. the GDP chain price index measures changes in prices of consumer goods, business investment government spending, exports, and imports. Real GDP is computed by dividing nominal GDP for year X by years X's GDP chain price index and then multiplying the result by 100

Circular Flow Model

a diagram representing the flow of products and resources between businesses and households in exchange for money payments

practice quiz: Which of the following would be counted as a final good for inclusion in GDP? a. A piece of glass bought this year by a consumer to fix a broken window b. a sheet of glass produced this year by Ford for windows in a new car c. A tire produced this year and sold to a car maker for a new car sold this year d. None of the above would be counted in GDP

a. Apiece of glass bought this year by a consumer to fix a broken window

practice quiz: Which of the following expenditures would not be included in GDP? a.Purchase of a new lawnmower. b.Purchase of a silver cup previously sold new in 1.950. c.Purchase of a ticket to the latest movie. d.All of the above would be counted in GDP.

b.Purchase of a silver cup previously sold new in 1.950.

practice quiz: Which of the following is a shortcoming of GDP? a. GDP excludes changes in inventories. b. GDP includes an estimate of illegal transactions. c. GDP excludes non market transactions. d. GDP excludes business investment spending.

c. GDP excludes non market transactions.

practice quiz: the circular flow of economic activity is a model of the

flow of goods, resources payments, and expenditures between the sectors of the economy

Expenditure Approach

sums the four major spending components of GDP: consumption, investment, government spending, and net exports. Algebraically, GDP : C + I + G + (X - M), where X equals foreign spending for domestic exports and M equals domestic spending for foreign products.

practice quiz: GDP includes

the cleaning- up expenses associated with pollution

Personal Income (PI)

the total income received by households and is calculated as NI minus corporate taxes and Social Security taxes plus transfer payments and other income.

Gross Domestic Product (GDP)

the total market value of all goods and services produced over a specific period of time (usually a quarter or a year). It does not look at second-hand transactions and non productive financial transaction the most widely used measure of a nation's economic performance.

National Income (NI)

total income earned by households that own and supply resources. it is calculated as GDP minus depreciation