chapter 20

Question 1

GDP

Answer 1

• measures total income of a nation
• single best measures of society’s wellbeing
• total market value of all final goods and services produced within a country in a given period of time

Question 2

national income accounting

Answer 2

• 3 ways to measure
• added value
• add total flow of expenditure of final domestic output (or national product)
• add up total flow of income generated by the flow of domestic product

Question 3

value added approach

Answer 3

• only count all goods and services produced in a ear once
• there are intermediate goods (inputs to one firm and the outputs are used as inputs by other firms)
• the market value of all firms product or service minus the cost of inputs purchased from others
• value added = sales revenue - cost of intermediate goods
• value added - payments owed to firms factors of production
• measures economy’s total output

Question 4

GDP from the expenditure side

Answer 4

• adding up the expenditures needed to purchase the final output produced in that year
• consumption expenditure
• gross investment
• government purcahses
• net exports
• GDP = Ca + Ia + Ga + NXa

Question 5

gross investment

Answer 5

• all final purchases of machinery, equipment, tools by firms
• all constructions
• changes in inventories
• intellectual properties and products
• net investment = gross investment - depreciation

Question 6

government purchases

Answer 6

• all spending on the goods and services by government all the federal, state and local levels
• excludes transfer payments like social security or unemployment insurance benefits, pension plan

Question 7

net exports

Answer 7

• exports - imports
• imports: the value of all domestically produced goods and services purchased from firms, households or governments in other countries
• exports: the value of all goods and services sold to firms, households and governments in other countries

Question 8

what investment is and isnt

Answer 8

• investment means the purchase of capital
• not the purchase of financial assets like stocks and bonds
• all new output not consumed is capital

Question 9

GDP from the income side

Answer 9

• adding up factor incomes and other claims on the value output until all of that of that value is accounted for
• gives the sizes of the major components of the income generated by producing nations outputs

Question 10

factor incomes

Answer 10

• wages and salaries, interest, business profits

Question 11

nonfactor payments

Answer 11

• indirect taxes on the production and sale of goods and services
• subsidies act like negative taxes - payments from governments to firms
• depreciation

Question 12

GDP excludes nonproduction transactions

Answer 12

• 2 types
• purely financial transactions: public transfer payments that gov makes to households directly, private transfer payments: ex. money given by parents to kids, stock market transactions: buying and selling of stocks and bonds
• second hand sales

Question 13

GDP does not value

Answer 13

• economic bad
• illegal activities
• home production, volunteering, leisure

Question 14

theoretically and in practice

Answer 14

• using either method should get the same result
• in reality, many difficulties arise preventing this
• ex. misreporting income tax returns
• statistical discrepancy is added to calculations to make both measures equal

Question 15

GDP deflator

Answer 15

• measure of overall level of prices

- a way to measure inflation rate is to compute % increase in GDP deflator