EC chapter 10

T/F: GDP only includes tangible goods, not intangible services.

False; GDP includes both tangible goods and intangible services

T/F: GDP includes the value of both intermediate goods and final goods

GDP includes only the value of final goods because the value of intermediate goods is already included in the prices of the final goods

T/F: The GDP data reported in the news are always seasonally adjusted.

True

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. a. 5 b. 15 c. 30 d. 60

b. 15

when can an intermediate good be temporarily considered a final good?

when an intermediate good is produced and, rather than being used, is added to a firm's inventory of goods for use or sale at a later date

when the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure called _________________________________

when the government reports quarterly GDP, it presents the data after they have been modified by a statistical procedure called seasonal adjustment

When the government reports the GDP for a quarter, it usually presents GDP "at a(n) __________ rate."

When the government reports the GDP for a quarter, it usually presents GDP "at an annual rate."

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? Answer a. Net exports and GDP both rise. b. Net exports and GDP both fall. c. Net exports fall, while GDP does not change. d. Net exports do not change, while GDP rises.

c. Net exports fall, while GDP does not change.

what type of goods are goods that will be used for investment?

capital goods

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

Match the term to the definition: -Nominal GDP -Real GDP -GDP deflator -___________________ reflects only the quantities produced -___________________ reflects only the prices of goods and services -___________________ reflects both the quantities of goods and services the economy is producing and the prices of those goods and services

- real GDP reflects only the quantities produced - GDP deflator reflects only the prices of goods and services -Nominal GDP reflects both the quantities of goods and services the economy is producing and the prices of those goods and services

Because nominal GDP and real GDP must be the same in the base year, the GDP deflator for the base year always equals ______

100 GDP deflator = (Nominal GDP/Real GDP) x 100

An economy's gross domestic product is a. the excess of spending over income. b. the excess of income over spending. c. total income and total spending. d. total income times total spending.

An economy's gross domestic product is c. total income and total spending.

Business capital includes _______________, ________________, and ________________.

Business capital includes business structures, equipment, and intellectual property products.

Consumption is _________________

Consumption is spending by households on goods and services

T/F: When the government pays a Social Security benefit to an elderly person or an unemployment insurance benefit to a recently laid off worker, that salary is included in government purchases.

False

When monitoring the economy, economists and policymakers want to pay attention to regular seasonal changes.

False

T/F: GDP and GDI give exactly the same number.

False; GDP and GDI give *almost* exactly the same number. Why "almost"? The two measures *should* be precisely the same, but data sources are not perfect, so they differ

T/F: When one person sells a used car to another person, the value of the used car is included in GDP.

False; GDP does not include transactions involving items produced in the past

For an economy as a whole, expenditure must equal ____________

For an economy as a whole, expenditure must equal income

For an economy as a whole, income must equal ______________

For an economy as a whole, income must equal expenditure

What items does GDP exclude?

GDP excludes most items produced and sold illicitly, such as illegal drugs. It also excludes most items that are produced and consumed at home and, therefore, never enter the marketplace. For instance, GDP includes vegetables you buy at the grocery store but not vegetables you grow in your garden.

GDP measures the value of production that takes place within a specific interval of time; usually, that interval is __________________

GDP measures the value of production that takes place within a specific interval of time; usually, that interval is a year or a quarter (three months)

GDP measures two things at once: ____________________ and _______________________

GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services

Government purchases measure ________________

Government purchases measure spending on goods and services by local, state, and federal governments

Gross domestic product (GDP) is _______________________________ (the exact definition is important)

Gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

If total spending rises from one year to the next, at least one of two things must be true: 1. 2.

If total spending rises from one year to the next, at least one of two things must be true: 1.the economy is producing a larger output of goods and services, or 2. goods and services are being sold at higher prices.

In addition to adding up total expenditure in the economy to calculate GDP, the government also adds up total income in the economy to arrive at __________________

In addition to adding up total expenditure in the economy to calculate GDP, the government also adds up total income in the economy to arrive at gross domestic income (GDI).

Investment is ______________

Investment is the purchase of goods that will be used in the future to produce more goods and services

Net exports equal _______________

Net exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports)

Residential capital includes ___________________ and ___________________.

Residential capital includes the landlord's apartment building and a homeowner's personal residence.

The difference between GDP and GDI is called the _________________

The difference between GDP and GDI is called the statistical discrepancy

what is the difference between real and nominal GDP

The main difference between nominal GDP and real GDP is the adjustment for inflation. Since nominal GDP is calculated using current prices it does not require any adjustments for inflation

T/F: Transfer payments alter household income, but they do not reflect the economy's production

True

T/F: When Ford produces and sells a new car, the value of the car is included in GDP

True

T/F: When a Canadian citizen works temporarily in the United States, her production counts toward U.S. GDP.

True

T/F: When an American citizen owns a factory in Haiti, the production at her factory does not contribute to U.S. GDP.

True

T/F: When the government pays the salary of an Army general or a schoolteacher, that salary is included in government purchases.

True

T/F: When a domestic household, firm, or government buys a good or service from abroad, the purchase does not affect GDP

True; the purchase does not affect GDP because it reduces net exports by the same amount that it raises consumption, investment, or government purchases.

What are the two ways to compute GDP?

We can compute it for this economy in either of two ways: by adding up the total expenditure by households or by adding up the total income (wages, rent, and profit) paid by firms

An economy produces 10 cookies in year 1 at a price of $2 per cookie and 12 cookies in year 2 at a price of $3 per cookie. From year 1 to year 2, real GDP increases by a. 20 percent. b. 50 percent. c. 70 percent. d. 80 percent

a. 20 percent

Household spending on education is included in which of the following: a. consumption b. investment c. government purchases c. net exports

a. consumption

Which is the largest component of GDP? a. consumption b. investment c. government purchases d. net exports

a. consumption

Which of the following is true of nominal GDP: a. nominal GDP reflects both the quantities of goods and services the economy is producing and the prices of those goods and services b. nominal GDP reflects only the quantities of goods and services the economy is producing c. nominal GDP reflects only the prices of goods and services the economy is producing d. nominal GDP reflects neither the quantities of goods and services the economy is producing nor the prices of those goods and services

a. nominal GDP reflects both the quantities of goods and services the economy is producing and the prices of those goods and services

Which of the following is true of real GDP: a. Because price changes affect real GDP, changes in real GDP reflect only changes in the total quantity of products produced. b. Because price changes do not affect real GDP, changes in real GDP reflect only changes in the total quantity of products produced. c. Because price changes affect real GDP, changes in real GDP reflect only changes in the total value of products produced. d. Because price changes do not affect real GDP, changes in real GDP reflect only changes in the total value of products produced.

b. Because price changes do not affect real GDP, changes in real GDP reflect only changes in the quantities produced.

If all quantities produced rise by percent and all prices fall by percent, which of the following best describes what occurs? a. Real GDP rises by percent, while nominal GDP falls by percent. b. Real GDP rises by percent, while nominal GDP is unchanged. c. Real GDP is unchanged, while nominal GDP rises by percent. d. Real GDP is unchanged, while nominal GDP falls by percent.

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

Suppose that a household buys a $50,000 car from Volvo, the Swedish carmaker. This transaction: a. reduces consumption by $50,000 and reduces net exports by $50,000 b. increases consumption by $50,000 and reduces net exports by $50,000 c. increases consumption by $50,000 and increases net exports by $50,000 d. reduces consumption by $50,000 and increases net exports by $50,000

b. This transaction increases consumption by $50,000 because car purchases are part of consumer spending and reduces net exports by $50,000 because the car is an import

Which of the following is true of GDP: a. additions to inventory add to GDP, and reductions in inventory add to GDP. b. additions to inventory add to GDP, and reductions in inventory subtract from GDP. c. additions to inventory subtract from GDP, and reductions in inventory add to GDP. d.additions to inventory subtract from GDP, and reductions in inventory subtract from GDP.

b. additions to inventory add to GDP, and reductions in inventory subtract from GDP.

After graduation, an American college student moves to Japan to teach English. Her salary is included a. only in U.S. GDP. b. only in Japan's GDP. c. in both U.S. GDP and Japan's GDP. d. in neither U.S. GDP nor Japan's GDP.

b. only in Japan's GDP

Which of the following is true of GDP: a. Both nominal GDP and real GDP use *current prices* to value the economy's production of goods and services b. Nominal GDP uses *constant base-year prices* to value the economy's production of goods and services. Real GDP uses *current prices* to value the economy's production of goods and services c. Nominal GDP uses *current prices* to value the economy's production of goods and services. Real GDP uses *constant base-year prices* to value the economy's production of goods and services d. Both nominal GDP and real GDP use *constant base-year prices* to value the economy's production of goods and services

c. Nominal GDP uses *current prices* to value the economy's production of goods and services. Real GDP uses *constant base-year prices* to value the economy's production of goods and services

If Mr. Keating quits his job as a teacher to home school his own children, GDP a. stays the same because he is engaged in the same activity. b. rises because he now pays lower income taxes. c. falls because his market income decreases. d. could rise or fall, depending on the value of home schooling.

c. falls because his market income decreases.

GDP is an imperfect measure of well-being because it a. includes physical goods produced but not intangible services. b. excludes goods and services provided by the government. c. ignores the environmental degradation from economic activity. d. is not correlated with other measures of the quality of life.

c. ignores the environmental degradation from economic activity.

What are the four components of GDP?

consumption, investment, government purchases, and net exports

critics of using GDP to measure well-being would point out that GDP:

critics of using GDP to measure well-being would point out that GDP: -omits the value of goods and services produced at home -excludes is the quality of the environment -says nothing about the distribution of income

Which of the following would increase specifically net exports: a. A domestic firm's sale to a buyer in the U.S b. A foreign firm's sale to a buyer in the U.S c. A foreign firm's sale to a buyer in another country d. A domestic firm's sale to a buyer in another country

d. A domestic firm's sale to a buyer in another country (such as Boeing's sale of an airplane to British Airways, increases net exports)

Which of the following does NOT add to U.S. GDP? a. Boeing manufactures and sells a plane to Air France. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal government sends a Social Security check to your grandmother.

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

periods during which GDP declines are called _______________

periods during which GDP declines are called recessions

what is the main exception of purchases that are not included in consumption? what is it considered

purchases of new housing; it is considered an investment

is real GDP or nominal GDP a better gauge of economic well-being?

real GDP; Because real GDP measures the economy's production of goods and services, it reflects the economy's ability to satisfy people's needs and desires

International Paper makes paper, which Hallmark then uses to make a greeting card: In this situation which good is a final good and which is an intermediate good

the paper is an intermediate good and the card is a final good

How can GDP measure both total income and total expenditure at the same time?

total income and total expenditure are the same thing; some one sells a product, someone buys that product

What do we call the payments the government makes to a Social Security benefit to an elderly person or an unemployment insurance benefit?

transfer payments because they are not made in exchange for a currently produced good or service