Midterm 2 Chapter 8

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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. - profit is defined as what is left over from total business receipts after all other costslong dash​wages, ​rents, interestlong dashhave been paid.

Total income can be viewed as the sum of

- the dollar value of output produced since total income and total production are equal. ​- wages, rents,​ interest, and profits. - payments to factor services such as​ land, labor,​ capital, and entrepreneurial activity.

According to the circular flow of income and​ output, which of the following is not​ true? A. In every economic​ transaction, the seller receives exactly the same amount that the buyer spends. B. Total income and total output must be equal. C. ​Goods, services and money all flow in one direction since money pays for the goods and services. D. Goods and services flow in one direction and money payments flow in the other direction.

C. Goods, services and money all flow in one direction since money pays for the goods and services.

FORMULAS GDP​ = C​ + netI​ + G​ + X​ + depreciation NDP​ = C​ + I​ + G​ + X - depreciation GDP - depreciation​ = NDP

CORRECT

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

Mr. King performs the service of painting his own house instead of paying someone else to do it. This activity is _____ in GDP.

Excluded

Mr. Langham sells a used laptop computer to his neighbor. This activity is ______ in GDP.

Excluded

Mrs. Ho receives a Social Security payment. This activity is _________ in GDP.

Excluded

Mrs. King takes photos of planets and stars as part of her astronomy hobby. This activity is _______ in GDP.

Excluded

GDP counts intermediate goods because to not do so would result in GDP being undervalued.

FALSE

Personal income is the income received by households after personal income taxes are paid.

FALSE

The dollar value of total output is equal to the total monetary value of all _______ goods and services produced.

Final

What is correct about GDP

GDP excludes nonmarket production and is not a measure of a​ nation's overall welfare.

What is 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.

______ 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

Mr. Ho spends​ $10,000 on shares of stock via an Internet trade order. This activity is excluded in GDP. Mr. Ho pays a​ $10 brokerage fee. This activity is _________ in GDP.

Included

Mr. King paints houses for a living. This activity is _____ in GDP.

Included

Mrs. King earns income from parents by taking baby photos in her home photography studio. This activity is _______ in GDP.

Included

Ms. Chavez makes a​ $300 payment for an​ Internet-based course on stock trading. This activity is ______ in GDP.

Included

​E*Trade charges fees to process Internet orders for stock trades. This activity is ______ in GDP.

Included

To obtain disposable personal​ income, we subtract all personal ______ benefits from personal income. Disposable personal income is income that individuals actually have for consumption or saving.

Income Taxes

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.Real GDP is computed by adjusting nominal GDP for

The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ______

PROFIT

Disposable personal income is personal income after personal income taxes have been paid.

TRUE

For a​ business, profit is a cost of production.

TRUE

Gross domestic income​ (GDI) is identical to gross domestic product​ (GDP).

TRUE

In the circular flow model of income and​ output, households sell FACTOR services to businesses that pay for those services. The receipt of payments is total INCOME. Businesses sell goods and services to households that pay for them.

TRUE

National income is income earned by all U.S. factors of production.

TRUE

The dollar value of total output is always equal to total income.

TRUE

To go from personal income to disposable personal​ income, personal income taxes must be subtracted.

TRUE

Total income is the annual cost of producing the entire output of final goods and services.

TRUE

The year at which the plots of nominal GDP and real GDP cross is the BASE year. At this crossing​ point, nominal GDP is EQUAL TO real GDP and the price index for that year is 100

This fact means that at this crossing​ point, the flow of goods and services are valued in​ current-year prices that are THE SAME AS base-year prices

The expenditure approach to tabulating GDP

adds up the total amount spent on newly produced domestic goods and services during the 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​ together?

consumption​ expenditures, gross private domestic​ investment, government​ expenditures, and net exports

The U.S. government spends considerably less on antipollution efforts this year than it did in recent years. As a result of​ this, GDP ____

decreases

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 _____

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.

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 GPA? - The manufacturer purchases a chip in June. - Then the manufacturer uses it as a component in a computer in August. - Finally, the company sells the computer to a customer in November.

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 durables, consumer nondurables, and services

expenditure

In the circular flow of income

households demand goods and services that are supplied by​ firms, while supplying resources that are demanded by firms.

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 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 ________ income, 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

A transaction that is included in GDP

paying your dentist to have your teeth cleaned.

To obtain _______ income, 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

The largest component of GDP by far is

personal consumption expenditures.

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.

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 ______

remains the same

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

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 ______

remains unchanged

To derive GDP using the income​ approach, we add up all factor​ payments, including wages, profit, interest, and _____

rent

Total income equals the dollar value of total output because

spending by one group represents income to the other group.

Gross domestic product is defined as

the total market value of all final goods and services produced in an economy during a year.

Gross output is

the total market value of all goods and services produced during a year by factors of production located within a​ nation's borders, including all forms of​ business-to-business expenditures and thereby double counting business spending across all stages of production.

To avoid double​ counting, we look only at final goods and services produced​ or, equivalently, at

value added

What is used to calculate gross domestic income​ (GDI)?

wages​ + interest​ + rent​ + profit​ + indirect business taxes​ + depreciation​ = GDI


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