Economics Today The Macro View Ch. 8 - Measuring the Economy's Performance (Homework, Terms & Quiz)
Final Goods and Services
Goods are services that are at their final stage of production and will not be transformed into yet other goods or services. For example, wheat ordinarily is not considered a final good because it is usually used to make a final good, bread.
Intermediate Goods
Goods used up entirely in the production of final goods.
Depreciation
Reduction in the value of capital goods over a one-year period due to physical wear and tear and also to obsolescence; also called capital consumption allowance.
Gross Domestic Income (GDI)
The sum of ALL INCOME-- wages, interest, rent, and profits -- paid to the four factors of production.
Gross Domestic Product (GDP)
The total market value of all final goods and services produced during a year by factors of production located within a nation's borders.
National Income (NI)
The total of all factor payments to resource owners. It can be obtained from net domestic product (NDP) by subtracting indirect business taxes and transfers and adding net U.S. income earned abroad and other business income adjustments.
Nonincome Expense Items
The total of indirect business taxes and depreciation.
Nominal Values
The values of variables such as GDP and investment expressed in current dollars, also called money values; measurement in terms of the actual market prices at which goods and services are sold.
Total Income
The yearly amount earned by the nation's resources (factors of production). Total income therefore includes wages, rent, interest payments, and profits that are received by workers, landowners, capital owners, and entrepreneurs, respectively.
The following table contains national income accounting data for a hypothetical economy: Disposable personal income - $7,000 million Personal income tax and nontax payments - $900 million Government and business transfer payments - $1,500 million Corporate taxes, Social Security contributions, and corporate retained earnings - $1,100 million Indirect business taxes - $900 million Depreciation - $1,000 million Starting from the value for disposable personal income (DPI), gross domestic product is calculated to be $_____ (enter your response as an integer).
To derive GDP, start with disposable personal income ($7,000 million) and add the following: personal income tax and nontax payments ($900 million); corporate taxes, social security contributions, and corporate retained earnings ($1,100 million); indirect business taxes ($900 million); and depreciation ($1,000 million). Then subtract government and business transfer payments ($1,500 million). ------------------------------------- gdp= $9,400
The following table contains national income accounting data for a hypothetical economy: Disposable personal income - $8,000 million Personal income tax and nontax payments - $1,000 million Government and business transfer payments - $1,600 million Corporate taxes, Social Security contributions, and corporate retained earnings - $1,200 million Indirect business taxes - $1,000 million Depreciation - $1,100 million Starting from the value for disposable personal income (DPI), gross domestic product is calculated to be $_____ (enter your response as an integer).
To derive GDP, start with disposable personal income ($8,000 million) and add the following: personal income tax and nontax payments ($1,000 million); corporate taxes, social security contributions, and corporate retained earnings ($1,200 million); indirect business taxes ($1,000 million); and depreciation ($1,100 million). Then subtract government and business transfer payments ($1,600 million). ------------------------------------- gdp= $10,700
1) An increase in corporate income taxes would reduce A. net domestic product. B. national income. C. gross domestic product. D. personal income. 2) An increase in social security benefits will make A. national income smaller. B. national income larger. C. personal income larger. D. net domestic product smaller.
1) D. personal income. 2) C. personal income larger.
To correct nominal GDP for price changes, we must 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
The following table gives nominal GDP and the price index for two years. Find per capita real GDP in each year and fill in the table. (Round your answers to two decimal places.) YR |Nominal GDP | Real GDP | 2010 6,700 6381 2011 7,236 6461 Population | Per Cap Real GDP 100 _____ 103 _____ --------------------------------------------------------- The growth rate of real GDP between 2010 and 2011 was ___%, and the growth rate of per capita real GDP was ___%. (Round your answers to two decimal places.)
63.81 62.72 Per Cap Real GDP = Real GDP / Population 2010yr 6381/100= 63.81 2011yr 6461/103=62.72 ------------------------------------------------- 1.25% = (63.81-62.72 / 63.81 X100) -1.71% = (62.72-63.81 / 63.81 X100)
National Income Accounting
A measurement system used to estimate national income and its components. One approach to measuring an economy's aggregate performance.
Disposable personal income refers to the income used by households for all purchases of nondurable goods during a year. A. False B. True
A. False
Which of the following statements is correct? A. GDP excludes nonmarket production and is not a measure of a nation's overall welfare. B. GDP includes nonmarket production and is therefore a good measure of a nation's overall welfare. C. GDP includes nonmarket production but is not a measure of a nation's overall welfare. D. GDP excludes nonmarket production but is usually considered a good measure of a nation's overall welfare.
A. GDP excludes nonmarket production and is not a measure of a nation's overall welfare.
For a business, profit is a cost of production. A. True B. False
A. True
National income is income earned by all U.S. factors of production. A. True B. False
A. True
The dollar value of total output is always equal to total income. A. True B. False
A. True
To go from personal income to disposable personal income, personal income taxes must be subtracted. A. True B. False
A. True
In the circular flow of income A. households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms. B. households demand goods and services which are supplied by firms, and the firms demand resources that are supplied by intermediate firms. C. households buy goods and services and firms supply goods. Resources are supplied by other firms. D. households buy goods and services while firms sell goods and services. Firms obtain labor from households, capital from government, and raw materials from firms.
A. households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms.
The problem with using foreign exchange rates to convert one country's GDP into dollars is that A. not all goods and services are sold on world markets. B. exchange rates do not reflect differences in inflation rates. C. the values of currencies are not comparable. D. the dollar has been losing value over the last twenty years.
A. not all goods and services are sold on world markets.
The simple circular flow model shows that A. total income received by households must be equal to the dollar value of all goods and services produced. B. total income received by households is different from the dollar value of all goods and services produced because the units of measurement are not the same. C. total income received by households is less than the total value of goods and services produced because of leakages. D. total income received by households is less than total payments to business because there are business profits.
A. total income received by households must be equal to the dollar value of all goods and services produced.
The following table gives categories for income and expenditures for a representative country: -------------------------------------------------------- 1. Net exports of goods and services -(negative)750 2 . Net interest paid by business 600 3. Government purchases of goods and services 2,250 4. Gross private domestic investment 3,000 5. Indirect business taxes 600 6. Rental income of individuals plus implicit rent on owner-occupied housing 300 7. Wages, salaries, employee compensation 9,000 8. Personal consumption expenses 10,500 9. Depreciation 1, 200 10. Proprietorial income 1,500 11. Corporate profits 1,800 --------------------------------------------------------- Use the data in the table to calculate Gross Domestic Product (GDP) for this country. GDP is equal to $_____. Use the data in the table to calculate Net Domestic Product (NDP) for this country. NDP is equal to $_____.
Add -750 2,250 3,000 9,000 1,500 =GDP $15,000. ndp = gdp - depreciation 15,000 - 1,200 = $13,800 NDP
Purchasing Power Parity
Adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries.
Indirect Business Taxes
All business taxes except that tax on corporate profits. Indirect business taxes include sales and business property taxes.
Capital Consumption Allowance
Another name for depreciation, the amount that businesses would have to put aside in order to take care of deteriorating machines and other equipment.
Investment
Any use of today's resource to expand tomorrow's production or consumption.
Which of the following is a true statement about comparing world incomes? A. The purchasing power of currency is about the same in most countries, so it is not necessary to adjust for purchasing power. B. Adjusting world incomes for purchasing power gives a more accurate view than using market foreign exchange rates. C. It is more accurate to compare world incomes by using per capita income measured in the currency of each nation. D. The best way to compare world incomes is to convert to a common currency using market foreign exchange rates.
B. Adjusting world incomes for purchasing power gives a more accurate view than using market foreign exchange rates.
Personal income is the income received by households after personal income taxes are paid. A. True B. False
B. False
Which of the following transactions would not be included in GDP? A. The town of South Bristol builds a school. B. Scott buys 100 shares of Microsoft stock. C. Jeanne purchases new computers for her small business. D. Chris buys a new car.
B. Scott buys 100 shares of Microsoft stock.
Which of the following is the definition of national income (NI)? A. The market value of all goods and services produced and sold. B. The total of all factor payments to resource owners. C. Personal income after personal income taxes have been paid. D. The amount of income that households receive before paying taxes.
B. The total of all factor payments to resource owners.
Total income is the annual cost of producing the entire output of final goods and services. A. False B. True In product markets, A. factor services flow to businesses and money flows to households. B. consumer goods and services flow to businesses and money flows to households. C. consumer goods and services flow to households and money flows to businesses. D. factor services flow to households and money flows to businesses.
B. True C. consumer goods and services flow to households and money flows to businesses.
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, A. national income, personal income, and disposable income should increase. B. disposable income should increase while personal income and national income are unchanged. C. both personal and disposable personal income should increase. D. personal income, disposable personal income, and national income remain unchanged.
B. disposable income should increase while personal income and national income are unchanged.
When comparing per capita GDP across countries, GDP should be adjusted for A. the unemployment rate. B. purchasing power parity. C. population. D. foreign exchange rates.
B. purchasing power parity.
Per capita real GDP equals A. real GDP/investment capital. B. real GDP/population. C. real GDP/human capital. D. real GDP in the nation's capital, Washington, D.C.
B. real GDP/population.
What is the difference between nominal GDP and real GDP? A. Nominal GDP is the total value of output produced while real GDP is the amount per individual. B. Nominal GDP is computed by using the expenditure approach while real GDP is computed by using the income approach. C. Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year. D. Nominal GDP represents purchasing power while real GDP is measured in terms of current dollars.
C. Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.
Using the expenditures approach to national income accounting, which of the following would be counted as consumption? A. Upper A homeowner mows his own lawn. B. Jim places an illegal bet on a football game. C. Residents of New York City buy food every week. D. Stacey buys a used car.
C. Residents of New York City buy food every week.
Real GDP is computed by adjusting nominal GDP for A. depreciation. B. exchange rate changes. C. changes in the price level. D. capital consumption allowances.
C. changes in the price level.
If a household purchases a new car and a new refrigerator, this would be classified as spending on A. consumer nondurables. B. consumer services. C. consumer durables. D. None of the above.
C. consumer durables.
The largest component of GDP by far is A. net exports. B. gross private domestic investment. C. personal consumption expenditures. D. government purchases of goods and services.
C. personal consumption expenditures.
The income households actually receive before they pay personal income taxes is: A. disposable personal income. B. national income. C. personal income. D. gross domestic income.
C. personal income.
The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called A. nominal purchasing power. B. raw purchasing power. C. purchasing power parity. D. currency-adjusted purchasing power.
C. purchasing power parity.
When GDP is corrected to reflect constant dollars, this price-corrected GDP is called A. NDP. B. nominal GDP. C. real GDP. D. the GDP deflator.
C. real GDP.
Total income equals the dollar value of total output because A. foreign trade is allowed. B. people spend all of their income in every period, so it must go somewhere. C. spending by one group represents income to the other group. D. of the definition of GDP.
C. spending by one group represents income to the other group.
The country with the highest per capita GDP based on purchasing power parity (U.S. dollars) is A. Japan. B. Germany. C. the United States. D. France.
C. the United States.
The following transactions take place in 2000: 1. An elderly couple go to the movies and pay $80 for the tickets. 2. A family sells numerous knick-knacks at a garage sale for $55. 3. A young executive buys 100 shares of IBM for $6,000. 4. A college student receives $400 from his parents. 5. A young couple down on their luck receive food stamps worth $150. 6. A plumber performs work for a neighbor and receives $75 in cash that he doesn't record in his company's records. 7. A physician operates on a friend's husband and charges $1,000 for the operation instead of her usual $3,000. 8. A teenager paints the porch on his parents' house. The paint cost $75. The cost of hiring a professional to do the job would have been $400. 9. A high school graduate works a summer job and makes $4,500. 10. The Federal Reserve Bank sells a bond for $1,000. The addition to gross domestic product is A. $14,055. B. $8,335. C. $5,655. D. $15, 335.
C. $5,655. The GDP will only include market transactions involving currently produced final output. These are: #1 for $80; #7 for $1,000; #8 for 75; and #9 for $4,500. The correct total is $5,655.
Inventory Investment
Changes in the stocks of finished goods and goods in process, as well as changes in raw materials that businesses keep on hand. Whenever inventories are decreasing, inventory investment is negative. Whenever they are increasing, inventory investment is positive.
Expenditure Approach (Method #1)
Computing GDP by adding up the dollar value at current market prices of all final goods and services.
Nondurable Consumer Goods
Consumer goods that are used up WITHIN 3 YEARS.
Durable Consumer Goods
Consumer goods that have a lifespan of (+3 YEARS).
Total income can be viewed as the sum of A. the dollar value of output produced since total income and total production are equal. B. wages, rents, interest, and profits. C. payments to factor services such as land, labor, capital, and entrepreneurial activity. D. All of the above.
D. All of the above.
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 A. profit is defined as what is left over from total business receipts after all other costs--wages, rents, interest--have been paid. B. spending by one group is income to another. C. both domestic product and income are measured in terms of market prices. D. Both (a) and (b) are correct.
D. Both (a) and (b) are correct.
If nominal GDP increases, it is possible that A. output has increased. B. prices have increased. C. both prices and output have increased. D. any of the above might have happened.
D. any of the above might have happened.
The biggest component of GDP using the expenditure approach is ____________ and the biggest component of GDP using the income approach is _____________. A. government expenditures; taxes B. consumer expenditures; profit C. investment expenditures; profit D. consumer expenditures; wages
D. consumer expenditures; wages
The following table gives the per loaf sales values at each stage of bread production: ---------------------------------------------- Stage of Production $ Value of Sales ---------------------------------------------- Stage 1: Seed, fertilizer - $0.08 Stage 2: Growing - $0.18 Stage 3: Milling - $0.30 Stage 4: Baking - $0.50 Stage 5: Retail price - $0.89 ---------------------------------------- The addition to GDP from the production and sale of one loaf of bread is A. $1.95. B. $0.39. C. $1.06. D. $0.89
D. $0.89 total production & retail is $1.95 minus the cost of production (stage 1-4) of $1.06. the difference is $0.89 the sale price
According to the circular flow of income and output, which of the following is not true? A. Goods and services flow in one direction and money payments flow in the other direction. B. In every economic transaction, the seller receives exactly the same amount that the buyer spends. C. Total income and total output must be equal. D. Goods, services and money all flow in one direction since money pays for the goods and services.
D. Goods, services and money all flow in one direction since money pays for the goods and services.
Constant Dollars
Dollars expressed in terms of real purchasing power, using a particular year as the base or standard of comparison, in contrast to current dollars.
Producer Durables, or Capital goods
Durable goods having an expected service life of more than three years that are used by business to produce other goods and services.
The following table gives categories for income and expenditures for a representative country: --------------------------------------------------------- 1. Net exports of goods and services -(negative)550 2 . Net interest paid by business 440 3. Government purchases of goods and services 1,650 4. Gross private domestic investment 2,200 5. Indirect business taxes 440 6. Rental income of individuals plus implicit rent on owner-occupied housing 220 7. Wages, salaries, employee compensation 6,600 8. Personal consumption expenses 7,700 9. Depreciation 880 10. Proprietorial income 1,100 11. Corporate profits 1,320 --------------------------------------------------------- Use the data in the table to calculate Gross Domestic Income (GDI) for this country. GDI is equal to $_____.
GDI is $11,000.
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 is a useful measure for tracking changes in the ____ ____ of overall economic activity over time, but is not a measure of well-being of a nation's residents because it falls to account for non market transactions, the amount and quality of leisure time, environmental or safety issues, labor market discrimination, and other factors that influence general welfare.
GDP market value
the expenditure approach
GDP = C + I + G + X where C = consumption expenditures I = investment expenditures G = government expenditures X = net exports
capital consumption allowance
GDP = C + I + G + X we know that the formula for NDP is NDP = C + I + G + X - depreciation Alternatively, because net I = I - depreciation, NDP = C + net I + G + X
Net Domestic Product (NDP)
GDP minus depreciation. NDP = GDP - depreciation
____ ____ ____ 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. To avoid double counting, we look only at final goods and services or, equivalently, at ____ ____. 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.
Gross domestic product value added exclude
Net Investment
Gross private domestic investment minus an estimate of the wear and tear on the existing capital stock. Net in vestment therefore measures the change in the capital stock over a one-year period.
Real Values
Measurement of economic values after adjustments have been made for changes in the average of prices between years.
Income Approach (Method #2)
Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits.
Services
Mental or physical labor or assistance purchased by consumers. Examples are assistance of physicians, lawyers, dentists, repair personnel, housecleaners, educators, retailers, and wholesalers; items purchased or used by consumers that do not have physical characteristics.
Net exports
Net exports (X) = total exports - total imports
Disposable Personal Income
Personal income after personal income taxes have been paid.
Fixed Investment
Purchases by businesses of newly produced producer durables, or capital goods, such as production machinery and office equipment.
Personal Income (PI)
The amount of income that households actually receive before they pay personal taxes.
Gross Private Domestic Investment
The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future. Also included in this definition are changes in business inventories and repairs made to machines or buildings.
Value Added
The dollar value of an industry's sales minus the value of intermediate goods (for example, raw materials and parts) used in production.
Foreign Exchange Rate
The price of one currency in terms of another.
Each year, Johan typically does all his own landscaping and yard work. He spends $196 per year on mulch for his flower beds, $218 per year on flowers and plants, $45 on fertilizer for his lawn, and $245 on gasoline and lawn mower maintenance. The lawn and garden store where he obtains his mulch and fertilizer charges other customers $494 for the service of spreading that much mulch in flower beds and $48 for the service of distributing fertilizer over a yard the size of Johan's. Paying a professional yard care service to mow his lawn would require an expenditure of $1,253 per year, but in that case Johan would not have to buy gasoline or maintain his own lawn mower. a. In a normal year, calculate by how much does Johan's landscaping and yard work contribute to GDP. $___. b. Suppose that Johan has developed allergy problems this year and will have to reduce the amount of his yard work. He can wear a mask while running his lawn mower, so he will keep mowing his yard, but he will pay the lawn and garden center to spread mulch and distribute fertilizer. How much will all the work on Johan's yard contribute to GDP this year? $___. Suppose that Johan has developed allergy problems this year and will have to reduce the amount of his yard work. He can wear a mask while running his lawn mower, so he will keep mowing his yard, but he will pay the lawn and garden center to spread mulch and distribute fertilizer. At the end of the year, Johan realizes that his allergies are growing worse and that he will have to arrange for all his landscaping and yard work to be done by someone else next year. How much will he contribute to GDP next year? $___.
a. $704 b. $1,246 c. $2,254
Which of the following are production activities that are included in GDP? Which are not? a. Mr. King performs the service of painting his own house instead of paying someone else to do it. This activity is included/excluded in GDP. b. Mr. King paints houses for a living. This activity is included/excluded in GDP. c. Mrs. King earns income from parents by taking baby photos in her home photography studio. This activity is included/excluded in GDP. d. Mrs. King takes photos of planets and stars as part of her astronomy hobby. This activity is included/excluded in GDP. e. E*Trade charges fees to process Internet orders for stock trades. This activity is included/excluded in GDP. f. Mr. Ho spends $10,000 on shares of stock via an Internet trade order. This activity is included/excluded in GDP. Mr. Ho pays a $10 brokerage fee. This activity is included/excluded in GDP. g. Mrs. Ho receives a Social Security payment. This activity is included/excluded in GDP. h. Ms. Chavez makes a $300 payment for an Internet-based course on stock trading. This activity is included/excluded in GDP. in GDP. i. Mr. Langham sells a used laptop computer to his neighbor. This activity is included/excluded in GDP.
a. excluded b. included c. included d. excluded e. included f. excluded; included g. excluded h. included i. excluded
Explain what happens to the official measure of GDP in each of the following situations. a. Air quality improves significantly throughout the United States, but there are no effects on aggregate production or on market prices of final goods and services. As a result of this, GDP _____. b. The U.S. government spends considerably less on antipollution efforts this year than it did in recent years. As a result of this, GDP _____. c. The quality of cancer treatments increases, so patients undergo fewer treatments, which hospitals continue to provide at the same price per treatment as before. As a result of this GDP _____.
a. remains the same b. decreases c. decreases
Explain what happens to contributions to GDP in each of the following situations. a. 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 _____ . b. A 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 ______. c. 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 _____.
decreases remains unchanged remains unchanged
Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GDP? a. 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. b. A retail outlet of the company sells a computer manufactured during the current year. This activity is _____ in GDP. c. 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.
excluded included included 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 ____. To derive GDP using the income approach, we add up all factor payments including ____, ____, ____, and ____.
expenditure; durables; nondurables; services. wages; interest; rent; profits.
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 this item.
factor income
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. The dollar value of total output is equal to the total monetary value of all _____ (intermediate/final) goods and services produced. The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as _____.
factor income final profit
The dollar value of total output is equal to the total income monetary value of all ____ goods and services produced. The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ____.
final profit
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.
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. 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. 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.
national income personal income income taxes
Real GDP (formula)
nominal GDP = ------------------- X 100 price index
We can divide the ____ into real GDP to obtain per capita real GDP. 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 ____ of ____ across countries.
population exchange rate cost; living
