Economics chapter 5
4 categories of users
households, firms, governments, and the foreign sector
Which of the following factors are NOT included in the calculation of GDP? 1) Volunteer services 2)Crime rates 3) consumption expenditure 4) poverty rates
volunteer services, crime rates and poverty rates
Government transfer payments include all of the following except:
wage payments to police officers because they are payed in exchange for services.
Consumption expenditure
(or consumption) spending by households on goods and services such as food, clothing and entertainment contains 3 subcategories
Transfer payments are not included in the GDP because they
... Are not made in exchange for current goods and services
GDP can be expressed as ____
1) The total amount spent by households, firms, and the government in addition to net exports 2) The total market value of all final goods and services that are produced domestically each year 3) labor income plus capital income
When we choose to work less than our grandparents did and, in exchange, spend more time with family and friends, it means that...
1) We emphasize leisure over specific earnings 2) We are living in a society that is better off than our grandparents generation 3) The opportunity cost of forgone earnings is lower than our grandparents
GDP is an imperfect measure of well-being since
1) it only measures production, not the distribution of wealth 2) it does not capture the effects of income inequality
GDP
1) the market value of production 2) total expenditure (consumption, investment, government purchases, net exports) 3) total income (labor income and capital income)
Out of the labor forces
A person is considered to be out of the labor force if he or she did not work in the past week and did not look for work in the past four weeks. In other words, people who are neither unemployed nor employed are "out of the labor force" full time students, unpaid homemakers, retirees, and people unable to work because of disabilities are examples of people who are out of the labor force
True or false: Economic policies should be evaluated strictly in terms of weather or not they increase GDP
FALSE GDP is NOT a perfect measure of economic well-being
True or False: Government purchases include only federal purchases of final goods and services
False! they also include state and local government expenditures on final goods and services
C + I + G + NX= ?
GDP
real GDP
GDP adjusted for inflation. a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; real GDP measures the actual physical volume of production
Business fixed investment
The purchase by firms of new capitol goods such as machinery, factories and office buildings. Firms buy capitol goods to increase their capacity to produce
the relationship between GDP and expenditures on goods and services can be summarized by an equation...
Y= gross domestic product, or output C= consumption expenditure I= investment G= government purchases NX= net exports Y= C+I+G+NX
services
a large component of consumer spending, include everything from haircuts and taxi rides to legal, financial, and educational services
capitol good
a long-lived good that is used in the production of other goods and services (ex: factories and machines) classified as final goods if newly produced
nominal GDP
a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production
unemployment spell
a period during which an individual is continuously unemployed
unemployed
a person is unemployed if he or she did not work during the preceding week but made some effort to find work in the past four weeks
real GDP is a measure of GDP that
adjusts for inflation
imports
are purchases by domestic buyers of goods and services that were produced abroad. Since exports are included in consumption, investment, and government purchases but do not represent spending on domestic production, they must be subtracted. Imports are subtracted from exports to find the net amount of spending on domestically produced goods and services. add net exports
nominal GDP measures the value of all goods and services
at current-year prices
capital income includes the payments made to the owners of ____
both physical capital (such as machinery) and intangible capital (such as copyrights)
underground economy
buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal
GDP can be thought of as
capitol income plus labor income
labor income
comprises wages, salaries, and the incomes of the self-employed
labor income
consists of wages, salaries, and the income of the self-employed
GDP calculations count only final goods and services because
counting all intermediate goods and services would lead to doubles-counting of many activities
net exports include goods produced
domestically that are sold abroad, less goods that are produced abroad that are sold domestically.
The labor fore is the total number of ______ and ____
employed and unemployed
net exports
equal to exports minus imports
The unemployment rate is the
fraction of the labor force that is unemployed
final goods or services
goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of the GDP
Intermediate goods or services
goods or services used up in the production of final goods and services and therefore not counted as part of the GDP
Some goods and services that are not sold in markets ARE included in aggregates measures of the GDP. The most important of these includes goods and services provided by the
government
the addition of unsold goods to company inventories is...
included in GDP AND known as inventory investment
GDP
incomes of capital and labor
the purchase of financial assets such as stocks and bonds
is NOT considered part of investment spending in calculating GDP
Residential investment
is construction of new homes and apartment buildings. For GDP accounting purposes, residential investment is treated as an investment by the business sector, which then sells the homes to households.
capital income
is made up of payments to owners of physical capital (such as factories, machines, and office buildings) and intangible capital (such as copyrights and patents). The components of capital income include items such as profits earned by business owners, the rents paid to owners of land or buildings, interest received by bondholders, and the royalties by the holders of copyrights or patents.
why is environmental quality and resource depletion often left out of GDP measures
it is difficult to measure the value of clean air and rivers
real GDP is an imperfect measure of economic well-being because
it measures only goods and services that are prices and sold in markets
The underground economy contains both _________ and ________ activities, such as landscapers, babysitters, and organized crime
legal and illegal
consumer durables
long-lived consumer goods such as cars and furniture. Note that new houses are not treated as consumer durables but as part of investment
Gross Domestic product (GDP)
measures how much an economy produces in a given period, such as a quarter or a year. More precisely, GDP is the market value of the final goods and services produces in a country during a given period
economists include ____ as a component of GDP
net exports (NOT total exports)
which of the following are "quality of life" indicators that are left out of the GDP? 1) open space 2) low crime rate 3) resource depletion 4)cost-of-living
open space and low crime rate (cost of living is included in GDP through normal markets)
Discouraged workers
people who say they would like to have a job but have not made an effort to find one in the past four weeks
involuntary part-time workers
people who say they would like to work full-time but are able to find only part-time work
Imports must be subtracted from GDP because they are goods and services ______ the borders of the United States.
produced outside
government purchases
purchases by federal, state, and local governments of final goods such as fighter planes, and services, such as teaching in public schools. Government purchases do NOT include transfer payment, which are payments made by the government in return for which no current goods or services are received. example of transfer payments are social security benefits
A measure of GDP in which the quantities produced are valued at prices in a base year rather than at current prices is _____ GDP
real GDP
By aggregating the market values of goods and services, more expensive, economy-wide items...
receive a higher weighting than less expensive items
consumer nondurables
short-lived goods like food and clothing
investment
spending by firms on final goods and services, primarily capital goods and housing. divided into 3 categories (business fixed, residential, inventory)
For the purposes of GDP accounting, government purchases include:
spending on highway construction and the purchase of new military equipment (NOT social security payments)
inventory investment
the addition of unsold goods to company inventories. In other words, the goods that a firm produces but doesn't sell during the current period are treated, for accounting purposes, as if the firm had bought those goods from itself. (this convention guarantees that production equals expenditure) inventory investment can be positive or negative, depending on whether the value of inventories on hand rises or falls over the course of the year
duration
the duration of unemployment rises during recessions, reflecting the greater difficulty of finding work during those periods
which method of calculating GDP adds up consumption, investment, government purchases and net exports?
the expenditure method
unemployment rate
the number of unemployed people divided by the labor force
Participation Rate
the percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work) calculated by dividing the labor force by the working age (16 years+) population
which of the following is NOT included in investment spending in calculating GDP
the purchase of stocks and bonds
market value
the selling prices of goods and services in the open market. - drawback: not all economically valuable goods and services are bought and sold in markets
Labor force
the total number of workers, including both the employed and the unemployed
value added
the value added by any firm equals the market value of its product or service minus the cost of inputs purchased from other firms
Suppose an auto manufacturer has 5,000 light-duty trucks left over on its lot at the end of the year 2016. In early 2017, the auto manufacturer sells the trucks to a dealer. How will the value of these trucks be added to GDP?
the value of the trucks is included in GDP for 2016, since that is when they were produced
In countries where non-market activities are widespread, the official measure of GDP tends to be...
understated