Chapter 5
Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?
Expenditures Approach
Which approach to GDP adds up all the spending on final goods and services that has taken place throughout the year?
Expenditures approach
What GDP uses prices adjusted for inflation?
Real
Investment goods
are the plant, machinery, and equipment that we produce.
Durable Goods
products that have expected lives of three years or more
National income is:
(GDP) - (Depreciation) + (Net foreign factor income)
Net domestic product is:
(GDP) - (depreciation)
Expenditure Method
- Government spending - Consumer spending - Net exports - Investment spending
Which of the following are included in the calculation of the GDP of an economy?
- Government spending on highways - Purchase of a new car produced in the economy - Purchase of a lawnmower produced in the economy
Which of the following is subtracted from national income to arrive at personal income?
- Indirect business taxes - Corporate profits
Two types of Non-production transactions
1. Financial Transactions 2. Secondhand Sales
inflation
An increase in the average level of prices of goods and services.
What type of market transactions are not included in measuring GDP?
Black, Secondhand, and Stock
What letter symbolizes personal consumption expenditures component of GDP?
C
Using the expenditure approach, which of the following defines the composition of GDP in an open economy?
C + I + G + (X-M)
Expenditures within the border of the United States, GDP formula is:
C+Ig+G+Xn+M
Imports outside the border of the United States, GDP formula is:
C+Ig+G+Xn-M
Added to national income to arrive at personal income:
Capital income transfer payments
The largest component of national income
Compensation of employees by firms
Which of the following is not included in the expenditure approach of GDP?
Depreciation
import
Goods and services purchased from international sources.
exports
Goods and services sold to foreign buyers.
consumption goods.
Goods and services used by households are called
Intermediate goods
Goods or services purchased for use as input in the production of final goods or in services.
equation of net investment
Gross investment minus depreciation
Products that are purchased for resale or further processing or manufacturing
Intermediate goods
Crude oil is a(n) ______ good. Gasoline is a(n) ____ good.
Intermediate, final.
What GDP uses current prices?
Nominal
What income is the net income of sole proprietorships, partnerships, and other unincorporated businesses?
Proprietors'
gross domestic product (GDP)
The total market value of all final goods and services produced within a nation's borders in a given time period.
measures of income
The total value of market incomes must equal the total value of final output, or GDP.
net exports
The value of exports minus the value of imports: (X − M).
real GDP
The value of final output produced in a given period, adjusted for changing prices.
Nominal GDP
The value of final output produced in a given period, measured in the prices of that period current prices
Gross investment
Total investment expenditure in a given time period.
All final purchases of plant, machinery and equipment in a given time period are included as gross investment. T/F
True
True or False: GDP is a monetary measure
True
An intermediate good is:
a good used in the production of final products
Why do the accountants regard residential construction as investment rather than consumption?
because apartment buildings and houses, like factories and stores, earn income when they are rented or leased.
GDP per capita can be used as a rough estimate of living standards...
but it tells us nothing about the way GDP is actually distributed or used
national income
by charting the flow of income through the economy, we see FOR WHOM the output is produced.
All new ouput that is not consumed is
capital
Retained earnings are a category of
corporate profits
If net investment is negative, the capital stock has...
decreased
in order to avoid problems created by using money values to measure GDP, when prices rise GDP should be ____ and when prices fall GDP should be _____
decreased; increased
Gross rental income minus ____ equals net rent
depreciation
Consumption goods and capital goods and services purchased by their end consumers are
final goods
Investment includes
final purchases of machinery, equipment, and tools by business enterprises
To avoid counting components each time, GDP includes only
finals goods
G =
government expenditure
M =
imports
Viewing GDP in terms of earnings derived or created by producing something is called what?
income approach
If GDP included unreported income, GDP would:
increase
If a mother enters the workforce and hires a nanny to take care of her children, GDP will ____ and we ____ definitively state that the standard of living went up by and how much
increase; cannot
If net investment is positive, the capital stock has...
increased
Subtracted from national income to arrive at personal income:
indirect business taxes corporate profits
An increase in the average level of prices of goods is ____.
inflation
I =
investment expenditure
net investment
is gross investment less depreciation.
Gross domestic product (GDP)
is the total dollar value of final output produced within a nation's borders in a given time period.
Real GDP
is the value of final output produced in a given period, adjusted for changing prices.
Multiple counting can be avoided by
measure and cumulating only the value added.
The chain-weighted price indexes employed by the U.S. Department of Commerce to compute real GDP use a ____ average of price levels in consecutive years as an inflation adjustment.
moving
Gross ____ product refers to the output produced by American-owned factors of production regardless of where they're located.
national
Income earned through the use of American-owned resources for services and production is called
national income
If net investment is ____, the capital stock has decreased. If net investment is ____ the capital stock has increased.
negative; positive
In economies where there are many women working outside the home, the increase in GDP due to hiring nannys and housekeepers may ____ improvements in the living standards.
overstate
What we call "consumption expenditures by households," the national-income accountants call
personal consumption expenditure.
The term that covers all expenditures by households is
personal consumption expenditures
Income received by households before payment of personal taxes is called:
personal income
disposable income=
personal income - personal taxes
Payments that transfer funds from one individual to another individual are not connected to any production are called
private transfer
Imports must be subtracted from GDP because they are goods and services ______ the borders of the US.
produced outside
Imports must be subtracted from GDP because they are goods and services ______ the borders of the United States.
produced outside
Personal income is the income households have
received
Gross national product
refers to the output produced by American-owned factors of production regardless of where they're located.
Undistributed corporate profits are called
retained earnings
National income accounting measures
the economy's overall performance
national income accounting
the measurement of aggregate economic activity, particularly national income and its components
An increase in inventories is an addition to what? What is this define
the stock of capital goods. Investment.
Depreciation is:
the wearing out of plant and equipment
Which one of the following is not included in the calculation of GDP
"Underground" purchases
Suppose consumption is $220b, government spending is $70b, investment is $50b,and GDP is $310b. Given this, net exports = ______b.
$-30b.
If households have a disposable income of $6,700 billion and paid $1,900 billion in personal taxes, then personal income must be
$8,600 billion.
Value of output
- Net exports - Investment spending - Consumer spending - Government spending
Value of income
- Profits - Interest - Rent - Wages
Which of the following are added to national income to arrive at personal income?
- Transfer payments - Capital income
Income Methond
- Wages - Rent - Interest - Corporate profits
A final good is:
- directly counted as part of GDP - a good directly consumed by individuals or businesses
GDP accounts have two sides:
-expenditure: demand side -income: supply side
The national accounts keep track of:
1. Business investment 2. Sales of producers 3. Spending by consumers and government
Items that comprise national income:
1. Interest 2. Compensation of employees 3. Proprietors' income 4. Taxes on production and imports 5. Rents 6. Corporate profits
What are the two ways to adjust nominal GDP to reflect price changes?
1. Multiply the current year's output by price of the output in the base year. 2. Nominal GDP divided by the price index
For the purpose of GDP accounting, government purchases include
1. The purchase of new military equipment 2. Spending on highway construction
A price index
1. always includes a base year. 2. measures the cost of purchasing a market basket of output across different years. 3. is normalized to 100 for the base year.
Part of taxes on production and imports
1. customs duties 2. business property taxes 3. license fees 4. excise taxes 5. general sales taxes
Private domestic investment expenditures consist of
1. newly produced housing 2. spending on new plant and equipment 3. any increase in inventories
As a measurement of economic output and the nation's wealth, GDP fails to account for
1. non-market activities 2. the underground economy 3. leisure time 4. improved product quality
Identify the things that would improve society's well-being but that are not measured as part of GDP
1. peaceful relations with other countries 2. better family relationships 3. reduced crime and violence 4. reduction of drug and alcohol abuse
two ways of looking at GDP
1. see how much the final user paid for it. 2. adding up the entire wage, rental, interest, and profit incomes.
As a measurement of economic output and the nation's wealth, GDP fails to account for: (measured with GDP)
1. underground economy 2. improved product quality 3. leisure time 4. non-market activities
If the price of a market basket of goods in year 1 is $10 and $25 in year 3 and the base year is year 1, the price index for year 3 is what?
250
The value of undergroup transactions in the U.S. is approximately what percent of recorded GDP?
8
Why is the value of final goods included in GDP but the value of intermediate goods excluded?
Because the value of final goods already includes the value of all the intermediate goods that were used in producing them.
GDP =
C + I + G + (X − M)
net investment
Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories. Gross investment less depreciation. -Minus-
True of false: Consumers are free to divide their income between saving and investment.
False
True or False: GDP is a perfect and complete measure of well being?
False
True or False: Intermediate goods are included in the calculation of GDP.
False
True or False: The transfer of claims to existing capital goods creates new capital
False
Net Domestic Product (NDP)
GDP - depreciation
Per capita GDP is
GDP divided by the total population
GDP VS GNP
GDP is geographically focused, including all output produced within a nation's borders regardless of whose factors of production are used to produce it.
net domestic product (NDP)
GDP less depreciation.
Net Domestic Product (NDP)
GDP less depreciation. This is the amount of output we could consume without reducing our stock of capital and thus next year's production possibilities.
Used as a rough estimate of living standards
GDP per capita
International comparisons of total output use
GDP per capita Gross Domestic Product
GDP per capita means:
GDP per person
What includes all federal, state, and local government outlays on final goods?
Government purchases
A nation's _____ reflects the total market value of all final goods and services produced within an economy in a given year
Gross Domestic Product
Which of the following is equal to net investment?
Gross investment minus depreciation
uses of output
Households - consumption Business Firms - investment Government - government spending Foreigners - net exports
What letter symbolizes Gross Private Domestic Investment component of GDP?
Ig
Personal Income (PI)
Income received by households before payment of personal taxes.
If a stay at home mom enters the workforce and hires a nanny then GDP will
Increase and we cannot definitively state that the standard of living went up and by how much
What consists of the money paid by private businesses to the suppliers of loans used to purchase capital?
Interest
Expenditure Method
Investment spending government spending net exports consumer spending
What happens to the size of the capital stock when gross investment and depreciation are equal?
It stays the same
The formula for calculating a price index is:
Price of market basket in a specific year divided by the price of the same market baset in the base year multiplied by 100.
What is the income received by households and businesses that supply property resources?
Rent
saving
That part of disposable income not spent on current consumption; disposable income less consumption.
depreciation
The consumption of capital in the production process; the wearing out of plant and equipment. .
income and expenditure
The flow of income that starts with GDP ultimately returns to the market in the form of new consumption (C), investment (I), and government purchases (G).
True of False: Calculating national income helps us understand FOR WHOM our output was produced.
True
True of false: Even though measuring some things that give us pleasure (like sunsets) is difficult to do, as long as the components of GDP bear some positive relation to our well-being, it serves a purpose.
True
True or False: Residential construction is a gross private domestic investment?
True
The market value of a firm's output less the value of the inputs the firm has bought from others
Value Added
Real Gross Domestic Product (GDP) is a measure of GDP that
accounts for price change
Personal Consumption Expenditures cover
all expenditures by households on goods and services.
When including the value of intermediate goods...
along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP
Aggregate output
annual total output of goods and services
Aggregate output is the primary measure of the economy's
annual total output of goods and services
The chain type of The real-world, more complex GDP price index used in the United States is
annual weighted price index
imports
are goods and services purchased from foreign sources.
exports
are goods and services sold to foreign buyers.
Intermediate goods
are goods or services purchased for use as input in the production of final goods or services.
"Underground" purchases
are not included in the calculation of GDP
Final goods are products that
are purchased by their end users.
Final goods
are the goods produced at the end of the production sequence, for use by consumers (or other market participants).
Net exports
are the value of exports minus the value of imports.
Real GDP, or adjusted GDP reflects
changes in the price level.
Components of the expenditure approach to measuring GDP:
consumption government spending gross investment
Goods and services purchased by households called
consumption goods
Secondhand sales are excluded from the calculation of GDP because they do not
contribute to current production
National income is the sum of compensation of employees, rents, interest, proprietors' income, taxes on production and imports, and:
corporate profits
The annual amount allocated to wear and tear on private investment is called
depreciation
The reimbursement businesses receive for the wear and tear that occurs on the capital resources they own is called
depreciation.
The distinction of imports from domestic-made goods is ____ to establish.
difficult
A final good is
directly counted as part of GDP a good directly consumed by individuals or businesses
It is difficult to
distinguish between imports of domestic-made goods
One of the shortcomings of GDP is that it doesn't reveal anything about
distribution of output
The after-tax profits that are distributed to stockholders are called
dividends
net exports include goods produced
domestically that are sold abroad, less goods that are produced abroad that are sold domestically.
we can view GDP in terms of the income derived or created from producing it as the
earning or allocations approach a.k.a. income approach
The effects of negative by-products reduce social and _____ well-being
economic.
National income accounting measures the overall performance of the
economy
wages and salaries piad buy businesses and government to their workers are called
employee compensation
Goods that are produced in a particular period but NOT sold in that period
end up in inventories and are included in investment
viewing GDP as the sum of all the money spend in buying it is output approach a.k.a.
expenditure approach
The view of GDP as the sum of money spend on buying it is called the
expenditure approach.
GDP accounts have two sides: one side focuses on the demand side called the ____ approach and the other side focuses on the supply side called the ____ approach.
expenditure; income
The view of GDP as the sum of money spent on buying it is called what?
expenditures
X =
exports
we measure gross domestic product by multiplying the quantities of goods bye their prices because it allows us to
express the values of products in a common unit of measurement
When describing the flow of income, GDP returns to the market in the form of
government spending investment consumption
All the final purchases of machinery, equipment, and tools by business enterprises, including construction, and changes in inventories make up
groos private domestic investment
Polluted air and water are examples of
gross domestic and negative by products
The dollar value of all final goods and services produced within the borders of a given country during a given period of time is the definition of
gross domestic product
All the final purchases of machinery, equipment, and tools by business enterprises, all construction, and changes in inventories make up what?
gross private domestic investment.
flow of income
households, in the form of disposable income. To businesses, in the form of retained earnings and depreciation allowances. To government, in the form of taxes
Net exports is exports minus ___
imports
Net exports is exports minus ____.
imports
By ignoring the value of leisure time, how does national income accounting affect our well-being?
in understates our well-being.
All residential construction are treated as
income
GDP can also be measured using the ____ approach, which adds the items that make up national earnings.
income
The flow of ____ is the idea that the dollar value of output will always equal the dollar value of income.
income
Nominal GDP is not an accurate measure of the real level of economic activity in a country because
inflation distorts the real value of all goods and services produced
American-owned factors of production employed in other nations creates an ____ of income for U.S. households.
inflow
American-owned factors of production employed in other nations creates an
inflow of income for US households
Income Method
interest rent corporate profits wages
Including the value of ____ goods along with the value of final goods in the calculation of GDP would amount to multiple counting of goods and distort GDP.
intermediate
Goods and services that are purchased for resale or for further processing or manufacturing are called
intermediate goods
residential construction is considered a(n) ___ rather than consumption
investment
underground economy
is motivated by tax avoidance or to conceal illegal activities.
Investment
is spending on (production of) new plant, equipment, and structures (capital) in a given time period, plus changes in business inventories.
Saving
is that part of disposable income not spent on current consumption -disposable income less consumption.
Disposable income (DI)
is the after-tax income of households. It is personal income less personal taxes.
Net domestic product
is the amount of output we could consume without reducing our stock of capital.
Depreciation
is the consumption of capital in the production process — the wearing out of plant and equipment.
Personal income (PI)
is the income received by households before payment of personal taxes.
Inflation
is the increase in the average level of prices of goods and services. it tends to obscure actual declines in real output.
Value added
is the increase in the market value of a product that takes place at each stage of the production process.
base period
is the time period used for comparative analysis. It is the basis for the indexing of price changes.
Nominal GDP
is the value of final output produced in a given period, measured in the prices of that period (current prices).
GDP per capita
is total GDP divided by total population-average of GDP. its commonly used as a measure of a country's standard of living.
National income (NI)
is total income earned by current factors of production.
gross investment
is total investment expenditure in a given time period.
Primary measure of the economy's performance is
its annual total output of goods and services. a.k.a. aggregate output
A business firm measures
its flows of income and expenditures regularly.
economists compare the __ value of the total output in various years, rather than __ volumes of production
market; actual
What are factors added to or subtracted from national income to balance the accounting statement of GDP?
net foreign factor income statistical discrepancy consumption of fixed capital
Gross investment minus depreciation is equal to
net investment
The flow of income that starts with GDP ultimately returns to the market in the form of:
new consumption, investment, and government purchases
GDP calculated using current prices is called
nominal GDP
The formula for real GDP is:
nominal GDP divided by price index (in hundredths)
When computing GDP using current prices, it is referred to as
nominal GDP.
What are the three categories of personal consumption expenditures?
nondurable goods durable goods services
transfer payments are excluded from government purchases in GDP accounting because
nothing is being produced in return for the payment
Government spending
on goods and services (excludes income transfers) claims about one-fifth of our annual output.
To measure aggregate output accurately, all goods produced in a particular year must be counted
once and only once.
At present, government spending on goods and services claims roughly ____ of total U.S. output
one-fifth
Using the figure illustrated, per capita real GDP data ____ social well being till 1995.
overestimates
Disposable income equals:
personal income minus personal taxes
Exports are included in GDP because the goods and services are
produced within the borders of the United States.
nondurable goods
products with less than three years of expected life.
Gross National Product (GNP)
refers to output produced by American-owned factors regardless of location.
GDP
refers to output produced within America's borders.
Gross domestic product
refers to output produced within America's borders.
National-income accounting
refers to the measurement of aggregate economic activity, particularly national income and its components.
The income received by the households and businesses that supply property resources is called
rent
the main reason to participate in the underground economy is to avoid
reporting actual income and paying income taxes
consumers are free to divide their income between consumption and ____
saving
Price
serves as a measure of value for calculating total output of a product
60% of personal consumption expenditures are on
services
More abundant leisure increases ____, but it ____ real GDP
social welfare; decreases
Foreign goods purchased by American consumers, firms, or governments should be ____ GDP because the goods were produced outside the United States.
subtracted from
Foreign goods purchased outside of the country should be
subtracted from GDP
Gross Domestic Product (GDP) defines aggregate output as
the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year.
The flow of income is the idea that
the dollar value of output will always equal the dollar value of income
Gross investment is:
the total amount of investment purchases in a given time period
stock of capital
the total collection of plant and equipment — will not grow unless gross investment exceeds depreciation.
the use of money as a common denominator to sum output into a meaningful measure of GDP creates a problem because
the value of money itself changes
Real GDP is gross domestic product measured
to reflect changes in the price level
Chain-weighted indices
use a moving average of price levels in consecutive years as an inflation adjustment.
chain-weighted indexes
use a moving average of price levels in consecutive years as an inflation adjustment.
The increase in the market value of a product that takes place at each stage of the production process is called:
value added
The market value of a firm's output minus the value of the inputs the firm has bought from others is called
value added
Government transfer payments include all of the following except
wage payments to police officers
To calculate real GDP
we adjust the market value of goods and services for changing prices.
Depreciation is the annual amount allocated to
wear and tear on private investment
The GDP identifies the mix of output a country has selected, which also answers the question of ____ to produce.
what
The GDP accounts also tell us what mix of output we've selected
—that is, society's answer to the core issue of WHAT to produce.
