Macro econ chapter 8

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Indicate whether each of the following transactions represents the purchase of a final good

1. The purchase of cotton fabriccotton fabric from a textile milla textile mill by a clothing companya clothing company. Is not the purchase of a final good 2. The purchase of a new fleet of police carsa new fleet of police cars by the locallocal government. Is the purchase of a final good 3. The purchase of domesticdomestic wine by a FrenchFrench consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good

Indicate whether each of the following transactions represents the purchase of a final good

1. The purchase of wheatwheat from a wheat farmera wheat farmer by a bakerya bakery. Is not the purchase of a final good 2. The purchase of a new fire trucka new fire truck by the locallocal government. Is the purchase of a final good 3. The purchase of domesticdomestic wine by a FrenchFrench consumer. Is the purchase of a final good 4. The purchase of a new machine tool by the Ford Motor Company. Is the purchase of a final good

Data from United Nations Development​ Programme, "The Human Development​ Index," (http://hdr.undp.org/en/statistics/hdi/). Why are there differences between the two​ lists?

A. GNI is not adjusted for pollution or other negative effects of production. B. GNI is not adjusted for crime or other social problems. C. The value of leisure is not included in GNI. D. GNI does not account for income distribution.

Think about the increase in spending for the Department of Homeland Security and the wars in Afghanistan and Iraq. These all represent government expenditures that have increased GDP yet the typical person might not necessarily be better off as a result. ​ Why?

A. The value of leisure is not included in GDP. B. GDP is not adjusted for crime or other social problems. C. GDP is not adjusted for pollution or other negative effects of production. D. GDP does not account for income distribution.

Why in microeconomics LOADING... can we measure production in terms of​ quantity, but in macroeconomics LOADING... we measure production in terms of market​ value?

A. ​If, in​ macroeconomics, we measured production using​ quantities, we would add tons of wheat grown by U.S. farmers to the number of iPods produced by​ Apple, to gallons of​ milk, and so on. B. When we measure total​ production, we​ can't just add together the quantities of every good and service because the result would be meaningless. C. Measuring production using market value in dollar terms allows us to add together many different goods and services.

U.S. Gross National Product​ (GNP) differs from U.S. Gross Domestic Product​ (GDP) in which of the following​ ways? ​(Mark all that​ apply.)

C. GNP considers production that occurs outside the U.S. This is the correct answer.D. GNP is the value of final goods and services produced by residents of the U.S. In the United​ States, the difference between GNP and GDP is smaller than that of many other countries.0

The figure above shows the values of the components of GDP for the year 20062006. Based on the data​ shown, which of the following statements regarding the components of GDP are​ false?

Consumer spending on services is less than the sum of spending on durable and nondurable goods.

Indicate whether you agree or disagree with the following statements. ​"If nominal GDP is less than real​ GDP, then the price level must have fallen during the​ year." ​"Whenever real GDP LOADING... ​declines, nominal GDP LOADING... must also​ decline." ​"If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline." ​"If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined."

Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall. Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined.

Indicate whether you agree or disagree with the following statements. ​"If nominal GDP is less than real​ GDP, then the price level must have fallen during the​ year." ​"Whenever real GDP LOADING... ​declines, nominal GDP LOADING... must also​ decline." ​"If a recession is so severe that the price level​ declines, then we know that both real GDP and nominal GDP must​ decline." ​"If real GDP stayed the same while nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have​ declined."

Disagree. Nominal GDP is less than real GDP if the current price level is less than the base year price level. A fall in the price level during the year is neither necessary nor sufficient to cause nominal GDP to be less than real GDP. Disagree. Real GDP falls if output falls. Nominal GDP can increase if output falls and prices rise. Agree. If both output and prices are​ falling, then both real GDP and nominal GDP will fall. Agree. If nominal GDP declined between 2008 and​ 2009, then the GDP deflator must also have declined.

If you were attempting to forecast the level of consumer spending by​ households, which measure of total production or total income might be most helpful in making your​ forecast?

Disposable personal income

In the circular flow of expenditure and​ income, why must the total value of production in an economy equal the total value of​ income?

Every penny spent on a good or service must end up as​ someone's income.

In the​ U.S., gross domestic product ​(GDP LOADING... ​) and gross national product ​(GNP LOADING... ​) are close in value. Under what circumstances would GNP be much larger than​ GDP?

Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S. Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad.

How is the GDP deflator​ calculated?

GDP deflator = Nominal GDP/Real GDP x 100

All of the following are correct except Which component of gross domestic income is the​ largest?

Gross domestic income does not include health insurance benefits received by the employees. wages

GDP is an imperfect measure of economic​ well-being because it fails to measure what types of​ production? Even if GDP included these types of​ production, why would it still be an imperfect measure of economic​ well-being?

Household production and the underground economy. A. GDP is not adjusted for crime or other social problems. B. GDP is not adjusted for pollution and it does not account for unequal income distribution. C. The value of leisure is not included in GDP.

Michael Burda of Humboldt University in Germany and Daniel Hamermesh of the University of Texas examined how workers in the United States who lost their jobs between 2003 and 2006 spent their time. They discovered that during the period when they were​ unemployed, the reduction in the number of hours of paid work was almost completely replaced by an increase in the number of hours spent on household production. ​Source: Michael Burda and Daniel S.​ Hamermesh, "Unemployment and Household​ Production," National Bureau of Economic Research working paper​ 14676, January 2009. Based on these​ findings, what can we predict about total productionlong dash—whether or not that production is included in the calculation of GDPlong dash—in the economy when these workers became​ unemployed?

If the workers had been paying other people to perform the household activities prior to​ unemployment, then total production will fall.

A report of the World​ Bank, an international organization devoted to increasing economic growth in developing​ countries, includes the following​ statement: ​"Informal economic activities pose a particular measurement problem​ [in calculating​ GDP], especially in developing​ countries, where much economic activity may go​ unrecorded." ​Source: The World Bank​, World Development Indicators​, Washington​ DC: The World​ Bank, 2003, p.189. What does the World Bank mean by​ "informal economic​ activities"? Why do these activities make it harder to measure GDP​ and, as a​ result, the standard of​ living?

In many developing​ countries, informal economic activities refer to activities in the underground economy. If a large portion of an​ economy's production is done in the underground​ economy, measured GDP will underestimate production and economic​ well-being.

Suppose the amount the federal government collects in personal income taxes decreasesdecreases​, while the level of GDP remains the same. What will happen to the values of national​ income, personal​ income, and disposable personal​ income?

National income will remain the same . Personal income will remain the same . Disposable personal income will increase

Suppose a house is built and sold in the year 2006. If the house is resold in the year​ 2015, is the value of the house included in Gross Domestic Product LOADING... ​(GDP) for​ 2015? Would the services of a real estate agent who helped sell​ (or helped​ buy) the house be included in GDP for​ 2015?

No. GDP for 2015 includes only production that occurs during 2015. Yes. GDP for 2015 includes the market value of final goods and services. This includes real estate services.

For the total value of expenditures on final goods and services LOADING... to equal the total value of income generated from producing those final goods and​ services, all the money that a business receives from the sale of its product must be paid out as income to the owners of the factors of production. How can a business make a profit if it pays out as income all the money it​ receives?

Profit is the income that remains after a firm has paid​ wages, rent, and interest.

Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the​ present, what would be true of the relationship between nominal GDP and real GDP

RGDP​ < NGDP because prices are rising.

We often use real GDP per capita LOADING... as a measure of a​ country's well-being. Review the definition of real GDP per capita before answering the following question. ​Today, the typical American works fewer than 40 hours per week. In​ 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the​ population's economic​ well-being?

The increase in real GDP per capita between 1890 and today understates​ well-being because the value of leisure is not included in GDP.

An artist buys scrap metal from a local steel mill as a raw material for her sculptures. Last​ year, she purchased ​$6 comma 0006,000 worth of scrap metal. With the steel she produced 10 authentic sculptures that she sold for ​$900900 each to a local art dealer. The art dealer then sold all of the sculptures to art collectors for an average of ​$1 comma 1001,100 each.

The total value added LOADING... of the art dealerart dealer is ​$ 2000

What is the difference between the value of a​ firm's final product and the value added by the firm to the final​ product?

The value of a​ firm's final product is the sale​ price; value added is the difference between the sale price and the price of intermediate goods.

Real GDP

The value of final goods and services evaluated at​ base-year prices. It is calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years. PrintDone

Why does inflation make nominal GDP LOADING... a poor measure of the increase in total production from one year to the​ next? How does real GDP LOADING... deal with the problem inflation causes with nominal​ GDP?

When nominal GDP increases from year to​ year, the increase is due partly to changes in prices and partly to changes in quantities. A. Real GDP separates price changes from quantity changes. B. By keeping prices​ constant, we know that changes in real GDP represent changes in the quantity of output produced. C. Real GDP uses the prices of goods and services in the base year to calculate the value of goods in all other years.

Which equation represents the relationship between GDP and the four major expenditure​ components? What are the four major components of expenditures in​ GDP?

Y=C+I+G+NX ​Consumption, Investment, Government​ Purchases, and Net Exports

Is the value of intermediate goods and services LOADING... produced during the year included in Gross Domestic Product LOADING... ​(GDP)? For​ example, is aluminumaluminum used to produce a new mountain bikemountain bike included in​ GDP? ​(Note that this question does not ask whether aluminumaluminum is directly counted in GDP but rather whether the production is included in GDP.​

Yes. The value of the aluminumaluminum is not directly counted in​ GDP, but the production of aluminumaluminum is included in the​ value-added method of measuring GDP.

Final good

a good or service purchased by a final user

Assuming that inflation has occurred over​ time, what is the relationship between nominal GDP LOADING... and real GDP LOADING... in each of the following​ situations?

a. In years after the base​ year, nominal GDP is greater than real GDP. b. In the base​ year, nominal GDP is equal to real GDP. c. In years prior to the base​ year, nominal GDP is less than real GDP.

Which of the following are likely to increase the measured level of GDP LOADING... and which are likely to reduce​ it

a. When the number of people working outside the home increasesincreases​, the measured level of GDP increases . b. When there is a sharp decreasedecrease in the crime​ rate, the measured level of GDP may increase or decrease . c. If lowerlower tax rates cause fewerfewer people to hide the income they​ earn, the measured GDP increases .

Which of the following are likely to increase the measured level of GDP LOADING... and which are likely to reduce​ it?

a. When the number of people working outside the home increasesincreases​, the measured level of GDP increases . b. When there is a sharp increaseincrease in the crime​ rate, the measured level of GDP may increase or decrease . c. If higherhigher tax rates cause moremore people to hide the income they​ earn, the measured GDP decreases .

Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company.

a. You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption Expenditure b. You purchase a 2011​ (preowned) Ford Escape Hybrid from a friend. Not included in GDP calculation c. Ford purchases door handles for the Escape from an auto parts manufacturer in Indiana. Not included in GDP calculation d. Ford produces​ 1,000 Escapes in a factory in Missouri and ships them to a car dealer in​ Shanghai, China. Net Export Expenditure e. Ford purchases new machine tools to use in its Missouri Escape factory. Investment Expenditure f. The state of Missouri builds a new highway to help improve access to the Ford Escape plant. Government Expenditure

An underground economy involves all of the following except Some countries have larger underground economies than do other​ countries, because

buying and selling of goods and services by obtaining a permit from the government. of government policies that are retarding economic growth.

An article on USAToday.com​ observed: ​"Consumer spending, once the driving force of the U.S.​ economy, is likely to remain stagnant for years as households struggle to cut debt and build up​ savings, economists​ say." ​Source: Karina​ Frayter, "Economists: Consumers​ Won't Save the​ Economy," USAToday.com, October​ 2, 2011. The cutting of debt and building up of savings If consumer spending remains​ stagnant, the economy

has reduced consumer spending and further slowed down the economic recovery in the short run. will most likely remain sluggish.

The movie Avatar overtook Titanic to become the​ highest-grossing movie of all time. An article on Forbes.com notes that​ "the average ticket price in 2008 ​(Avatar was released in​ 2009) was​ $7.18, up​ 56% from prices in 1997 when Titanic was in​ theaters." The article states that​ "A look at domestic grosses​ (box-office receipts) adjusted for inflation shows a more realistic view of Avatar​'s ​performance." ​Source: Dorthy​ Pomerantz, "Is Avatar Really King of the Box​ Office?" Forbes.com, January​ 27, 2010. Adjusting for inflation shows a more realistic view of ​Avatar's performance at the box office since A more accurate measure of how well a movie has performed at the box office would be Newspapers do not report the number of tickets sold The comparison of the total number of tickets sold by all movies in 1939 with the total number of tickets sold by all movies in 2011

it shows the increase in ticket prices in constant dollars. the inflation adjusted dollar value of tickets sold. since the dollar value of tickets sold is a better measure. will not be a good way to measure how the relative importance of movies in the economy has changed over time.

Economic historians Roger Ransom and Richard Sutch have estimated that​ African-American farmers in the U.S. South after the Civil War worked about 30 percent fewer hours per year than they had as slaves before the Civil War. If after the Civil​ War, African-American farmers had continued to work these additional​ hours, their production and income would have been higher and so would have been U.S. GDP. ​Source: Roger L. Ransom and Richard​ Sutch, One Kind of​ Freedom: The Economic Consequences of​ Emancipation, Second​ edition, New​ York: Cambridge University​ Press, 2001. The​ farmers' well-being After the Civil​ War, U.S. GDP

would not have been higher as a result of working these additional hours because value of an​ individual's well-being is not included in GDP calculation. could have been higher if the farmers did not reduce their work hours.

Indicate whether you agree or disagree with the following​ statement: ​"In years when people buy manymany shares of​ stock, investment will be highhigh ​and, therefore, so will gross domestic product LOADING... ​(GDP)."

​Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and​ inventory, not stock purchases.

How does the size of a​ country's GDP affect the quality of life of the​ country's people?

​Generally, the more goods and services people​ have, the better off they are.

Indicate whether the following statement is correct or incorrect. ​"Corporate profits are much too​ high: Most corporations make profits equal to 50 percent of the price of the products they​ sell."

​Incorrect: The largest component of gross domestic income is​ wages, which are about three times as large as profit.

If the U.S. Bureau of Economic Analysis​ (BEA) added up the values of every good and service sold during the​ year, would the total be larger or smaller than measured gross domestic product​ (GDP)?

​Larger: The value of all goods and services sold would include intermediate goods.


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