Chapter 8 study plan
Disposable personal income refers to the income used by households for all purchases of nondurable goods during a year.
False
Personal income is the income received by households after personal income taxes are paid.
False
Many other transactions are excluded from measured _____, among them household services rendered by homemakers, underground economy transactions, and illegal economic activities, even though many of these result in the production of final goods and services.
GDP
Calculate GDP
GDP = Consumption + Gross Private Domestic Investment + Gov. Spending + Exports - Imports
Which of the following statements is correct?
GDP excludes nonmarket production and is not a measure of a nation's overall welfare
Which of the following statements is not true about the use of GDP as a measure of national welfare?
GDP is a useful measure of national welfare since it excludes nonmarket transactions.
Which of the following equations is correct?
GDP minus− depreciation = NDP NDP = C + I + G + X minus− depreciation GDP = C + netI + G + X + depreciation ALL OF THE ABOVE
According to the circular flow of income and output, which of the following is not true?
Goods, services and money all flow in one direction since money pays for the goods and services.
is the total market value of final goods and services produced in an economy during a one-year period by factors of production within the nation's borders. It represents the dollar value of the flow of final production over a one-year period.
Gross domestic product
Calculate NDP
NDP = GDP - Depreciation Depreciation = capital stock has to be subtracted from the year's GDP.
Calculate NI
NI = NDP - Indirect Business tax
A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider. This activity is ____ in GDP.
included
A retail outlet of the company sells a computer manufactured during the current year. This activity is ____ in GDP.
included
To obtain disposable personal income, we subtract all personal ____ from personal income. Disposable personal income is income that individuals actually have for consumption or saving.
income taxes
To get an accurate measure of GDP using the income approach, we must also add _____ and ______ to those total factor payments.
indirect business taxes depreciation
GDP is a useful measure for tracking changes in the ___ of overall economic activity over time, but it is not a measure of the well-being of a nation's residents because it fails to account for nonmarket transactions, the amount and quality of leisure time, environmental or safety issues, labor market discrimination, and other factors that influence general welfare.
market value
to obtain ____ we subtract indirect business taxes and transfers from net domestic product and add other business income adjustments and net U.S. income earned abroad.
national income
For purposes of national income accounting, business fixed investment has traditionally included primarily purchases of
newly produced producer durables, or capital goods.
The problem with using foreign exchange rates to convert one country's GDP into dollars is that
not all goods and services are sold on world markets.
The loss in national welfare will
not be reflected in GDP since it is a non-market transaction and thus is not included in GDP.
Gross domestic product
only includes "final" goods and services to avoid double counting. does not include transfer payments or financial transactions. does not include the transfer of second-hand goods. ALL OF THE ABOVE
All of the following transactions are excluded from the measure of GDP except
paying your dentist to have your teeth cleaned.
Total income can be viewed as the sum of
payments to factor services such as land, labor, capital, and entrepreneurial activity. the dollar value of output produced since total income and total production are equal. wages, rents, interest, and profits. ALL OF THE ABOVE
Per capita real GDP measures the amount of real GDP
per person
The largest component of GDP by far is
personal consumption expenditures.
to obtain _____ we must add government transfer payments, such as Social Security benefits and food stamps. We must subtract income earned but not received by factor owners, such as corporate retained earnings, Social Security contributions, and corporate income taxes.
personal income
An increase in social security benefits will make
personal income larger.
An increase in corporate income taxes would reduce
personal income.
The income households actually receive before they pay personal income taxes is:
personal income.
We can divide the ____ into real GDP to obtain per capita real GDP.
population
In the circular flow of income
households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms.
The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ____.
profit
The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called
purchasing power parity
When comparing per capita GDP across countries, GDP should be adjusted for
purchasing power parity.
When GDP is corrected to reflect constant dollars, this price-corrected GDP is called
real GDP
Per capita real GDP equals
real GDP/population.
The BEA evaluated the effects of investments in intangible assets, such as "intellectual property products" that included releases of new songs by Justin Bieber and Lady Gaga, on measured average real GDP growth rates during 2007-2009 and 2009-2012. This resulted in alterations to the BEA's GDP computation that
reduced the measured severity of the recession between 2007 and 2009.
A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale. As a result of this, GDP
remains unchanged
tennis player wins two top professional tournaments as an unpaid amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of this, GDP
remains unchanged
The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because
spending by one group is income to another. AND profit is defined as what is left over from total business receipts after all other costs—wages, rents, interest—have been paid.
The country with the highest per capita GDP based on purchasing power parity (U.S. dollars) is
the United States.
If real GDP increases in any year, we know that
the output of goods and services produced this year has increased.
Gross domestic product is defined as
the total market value of all final goods and services produced in an economy during a year.
For a business, profit is a cost of production.
true
Gross domestic income (GDI) is identical to gross domestic product (GDP).
true
National income is income earned by all U.S. factors of production.
true
The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is known as purchasing power parity.
true
The difference between real GDP and nominal GDP for the same year reflects the amount of inflation that occurred during that year.
true
The dollar value of total output is always equal to total income.
true
Total income is the annual cost of producing the entire output of final goods and services.
true
To avoid double counting, we look only at final goods and services produced or, equivalently, at
value added
To derive GDP using the income approach, we add up all factor payments, including
wages profit interest rent
Which of the following equations is used to calculate gross domestic income (GDI)?
wages + interest + rent + profit + indirect business taxes + depreciation = GDI
To correct nominal GDP for price changes, we first select a base year for our price index and assign it the number _____. Then we construct an index based on how a weighted average of prices has changed relative to that base year. For example, if in the next year a weighted average of the prices indicates that prices have increased by 10 percent, we would assign it the number _____. We then divide each year's price index, so constructed, into its respective nominal GDP figure (and multiply by 100).
100 110
Real GDP of 2015
= Nominal GDP of 2015, since 2015 is the base year
The addition to GDP from the production and sale of one loaf of bread is
$0.95 Add all the stages together
According to the expenditure approach, if depreciation is $125 million, GDP is _____________ and NDP is ___________.
$1,200 million $1,075 million
Starting from the value for disposable personal income (DPI), gross domestic product is calculated to be $____
$10,700
Suppose that in 2017, geologists discover large reserves of oil under the tundra in Alaska. These reserves have a market value estimated at $50 billion at current oil prices. Oil companies spend $1 billion to hire workers and move and position equipment to begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one company accidentally spills some of the oil into a bay and by the end of the year pays $1 billion to other companies to clean it up. The oil spill kills thousands of birds, seals, and other wildlife. The combined effect of these events on GDP for the year 2017 was
$2 billion
The addition to gross domestic product is
$9,245
Nominal GDP
($ Shampoo in 2015 x Quantity of Shampoo in 2015) + ($ external hard drive in 2015 x Quantity of external hard drives in 2015) + ($ books in 2015 x Quantity of books in 2015) + ($ milk in 2015 x Quantity of milk in 2015) + ($ candy in 2015 x Quantity of candy in 2015)
Real GDP of 2019
(Price of books in 2015×Quantity of books in 2019)+(Price of milk in 2015×Quantity of milk in 2019)+(Price of candy in 2015×Quantity of candy in 2019) We can find the final value of the Real GDP by using the the appropriate price and quantity from the table.
A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge. As a result of this, GDP
decreases
Suppose social security contributions rise by $1 billion while social security benefits also rise by $1 billion. Further, personal income taxes fall by $500 million. As a result,
disposable income should increase while personal income and national income are unchanged.
Statisticians often calculate relative GDP by adding up each country's GDP in its local currency and dividing by the dollar _______. Because not all goods and services are bought and sold in the world market, however, we must correct exchange rate conversions of other countries' GDP figures to take into account differences in the true _____ across countries.
exchange rate cost of living
In measuring GDP, we must ____ (1) purely financial transactions, such as the buying and selling of securities; (2) government transfer payments and private transfer payments; and (3) the transfer of secondhand goods.
exclude
Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GDP? The manufacturer purchases a chip in June. This activity is ____ in GDP. Then the manufacturer uses it as a component in a computer in August. This activity is _____ in GDP. Finally, the company sells the computer to a customer in November. This activity is ______ in GDP.
excluded excluded included
The ___ approach to measuring GDP requires that we add up consumption expenditures, gross private investment, government purchases, and net exports. Consumption expenditures include consumer _____, consumer _____, and _____.
expenditure durables nondurables services
In the circular flow model of income and output, households sell ____ services to businesses that pay for those services. The receipt of payments is total _____. Businesses sell goods and services to households that pay for them.
factor income
GDP counts intermediate goods because to not do so would result in GDP being undervalued.
false
The dollar value of total output is equal to the total monetary value of all ______vgoods and services produced.
final
To go from personal income to disposable personal income, personal income taxes must be subtracted.
True
The BEA must estimate the future streams of returns on "intellectual property products" because real GDP is nominal GDP corrected for
changes in the average of overall prices from year to year.
If a household purchases a new car and a new refrigerator, this would be classified as spending on
consumer durables.
in product markets
consumer goods and services flow to households and money flows to businesses.
The biggest component of GDP using the expenditure approach is ____________ and the biggest component of GDP using the income approach is _____________.
consumer expenditures wages
To derive GDP using the expenditure approach, which of the following components are added togehter?
consumption expenditures, gross private domestic investment, government expenditures, and net exports
Price index
Nominal / Real x 100 for percent
What is the difference between nominal GDP and real GDP?
Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.
Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. Suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?
add all the shit together this time. 842
The expenditure approach to tabulating GDP
adds up the total amount spent on newly produced domestic goods and services during the year.
Each year after a regular spring cleaning, Maria spruces up her home a little by retexturing and repainting the walls of one room in her house. In a given year, she spends $28 on magazines to get ideas about wall textures and paint shades, $42 on newly produced texturing materials and tools, $38 on new paintbrushes and other painting equipment, and $170 on newly produced paint. Normally, she preps the walls, a service that a professional wall-texturing specialist would charge $196 to do, and applies two coats of paint, a service that a painter would charge $368 to do, on her own. When she purchases her usual set of materials and does all the work on her home by herself in a given spring, how much does Maria's annual spring texturing and painting activity contribute to GDP? $
all materials and supplies added together (NO SERVICE FEES/CHARGES) 278
Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. How much would her spring painting activity add to GDP?
all materials and supplies added together, plus the fee for the person to do the texturing 474
If nominal GDP increases, it is possible that
any of the above might have happened.
Real GDP is computed by adjusting nominal GDP for
changes in price level