Chapter 4

Question 1

Define GDP

Answer 1

The market value of all FINAL GOODS AND SERVICES within a country during a specific period (usually a year).

Question 2

Define Market Value

Answer 2

Goods are weighed according to the purchase price of the good or service. (The dollar is the common measure for the value of the goods/services produced) ; goods that are worth more add more to GDP.

Question 3

How is annual GDP calculated?

Answer 3

Total spending on all goods and services produced during the year is summed to obtain annual GDP.

Question 4

Define Final Goods and Services

Answer 4

Goods and services purchased by their ultimate user. (The ultimate user is the person who consumes that good or service rather than using it to produce something else).

Question 5

Define Intermediate Goods/Services

Answer 5

Goods purchased for resale or for use in producing another good or service. (INTERMEDIATE GOODS AND SERVICES ARE NOT INCLUDED IN GDP)

Question 6

Are tires an intermediate good or a final good?

Answer 6

If you are a car manufacturer and you are buying tires, it is an intermediate good; if you buy a tire to replace a flat one, then it is a final good.

Question 7

Are transfers included in the GDP?

Answer 7

No; for example, a $100 graduation gift is not included in the GDP. Transfer payments (Welfare, Unemployment, Social Security) aren’t included either.

Question 8

Are financial transactions counted in GDP?

Answer 8

No; however, sales commission would be counted in the GDP.

Question 9

GDP counts only goods and services produced within the ______.

Answer 9

Geographic borders of a country.

Question 10

Is the production of a Japanese car factory in the US included in U.S GDP?

Answer 10

YES

Question 11

Is the production of a U.S. Nike Shoe Factory in indonesia included in the U.S. GDP?

Answer 11

No

Question 12

What does it mean that GDP is a measurement of final goods and services provided during a SPECIFIC TIME PERIOD?

Answer 12

Only goods produced in 2023 are included in the figure for 2023 GDP.

Question 13

How will a car produced in 2005 and resold in 2023 affect 2023’s GDP?

Answer 13

It wouldn’t.

Question 14

What are the 2 ways to measure GDP?

Answer 14

1. Expenditure Approach
2. Resource Cost-Income Approach. BOTH ARE EQUIVALENT (should lead to the same value)

Question 15

What is the equation for the Expenditure Approach?

Answer 15

Y= C+I+G+NX

Y= GDP ; C= Consumption ; I= Private Investment ; G= Government Consumption and Gross Investment ; NX= Net Exports

Question 16

How do you calculate net exports?

Answer 16

Exports-Imports

Question 17

Define Consumption

Answer 17

Household spending on goods and services during the current period.

Question 18

What are Durable Goods?

Answer 18

Goods that can be used over and over again.

Question 19

What are non-durable goods?

Answer 19

Goods that cannot be used over and over again.

Question 20

What is Consumption consisted of?

Answer 20

Durable Goods-Non Durable Goods-Services

Question 21

Define (Gross) Investment

Answer 21

Production or construction of capital goods that provide future services.

Question 22

What is Gross Investment consisted of?

Answer 22

Fixed Investment-Inventory Investment

Question 23

How do you calculate Inventory Investment?

Answer 23

Ending-Beginning

Question 24

What is Fixed Investment ?

Answer 24

A piece of machinery begins to wear out or a patent approaches its expiration. This decline in value is measured as depreciation or consumption of fixed capital. At the same time, businesses and governments spend money on new fixed assets. These expenditures are called fixed investment

Question 25

What does Government Expenditures consist of?

Answer 25

Goods and Services-Capital Goods

Question 26

Does government expenditure include transfer payments?

Answer 26

NO

Question 27

Government expenditures are counted at _____ to tax payers.

Answer 27

Cost (not value added)

Question 28

Define Exports

Answer 28

Domestically produced goods and services sold abroad.

Question 29

Define Imports

Answer 29

Foreign produced goods and services purchased domestically.

Question 30

What is the Resource Cost-Income Approach consisted of? (All of these aspects are added together)

Answer 30

1. Employee Compensation. 2. Proprietor’s Income 3. Rent 4. Corporate Profits 5. Interest Income 6. Indirect Business Taxes 7. Depreciation 8. Net Income of Foreigners (-1.6%)

Question 31

Define GNP

Answer 31

Total market value of all final goods and services produced by the citizens of a country (COUNTS THE INCOME AMERICANS EARN ABROAD); ignores the income foreigners earn in the U.S.

Question 32

Define Nominal Values

Answer 32

Values expressed in current dollars.

Question 33

Define Real Values

Answer 33

Values that have been adjusted for the effects of inflation

Question 34

Define Price Index

Answer 34

Measures the cost of purchasing a market of goods at a point in time relative to the cost of purchasing the identical market basket during an earlier reference period. PI= COST OF BUNDLE DURING CURRENT YEAR/COST OF BUNDLE DURING BASE YEAR

Question 35

Define Consumer Price Index

Answer 35

Indicator of general level of prices. Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period. It is designed to measure the impact of price changes on the cost of the typical bundle of goods purchased by households.

Question 36

Define GDP Deflator

Answer 36

Reveals the cost during the current period of purchasing the items included in the GDP relative to the cost during the base year.

Question 37

What are the 2 Key Price Indexes

Answer 37

Consumer Price Index-GDP Deflator

Question 38

What is the main difference between GDP Deflator and CPI?

Answer 38

GDP Deflator is much broader than CPI, includes capital goods and other goods purchased by businesses and governments.

Question 39

What are the differences between CPI and GDP Deflator?

Answer 39

1. GDP Deflator measures the prices of all goods and services whereas the CPI measures the prices of only the goods and services bought by consumers. 2. The GDP Deflator includes only those goods and services produced domestically (EXCLUDES IMPORTED GOODS); CPI INCLUDES GOODS FROM OTHER PLACES. 3. The CPI is computed using a fixed basket of goods, whereas the GDP deflator allows the basket of goods to change over time as the composition of GDP changes.

Question 40

Which of the Price Indexes should we use?

Answer 40

It depends: How do rising prices affect households? USE CPI If we want an economy wide measure of inflation, USE GDP DEFLATOR.

Question 41

What are the things you need to know to calculate the Real Value?

Answer 41

1. Nominal Values 2. Price Index of the year you are converting to and the price index of the year you are converting from (YEAR YOU ARE COMPARING IT TO)

Question 42

What are the Limitations of GDP?

Answer 42

1. Excludes non-market production (non-market production is when you do something in the household and you’re not trying to buy/sell it in the marketplace) 2. Excludes the underground economy (the underground economy includes any transactions that take place outside recorded market channels; THESE TRANSACTIONS ARE NOT BEING RECORDED ANYWHERE) —-> for example, getting crack from your crack dealer. 3. Excludes leisure, safety, and human costs (GDP only measures what we produce; it doesn’t measure how fast and how safely we produce something) 4. Difficulties measuring quality variation and introduction of new goods (a 20k car produced in 1970 and a 20k car produced in 2023 will not have the same quality, although they both add the exact same value to the GDP of their respective years) 5. Excludes the costs of disaster sand harmful side effects of production (lets say a tornado wipes out an area; that doesn’t’ affect the GDP. When we go to rebuild that building, we add to GDP; this is the case even though we pretty much the same building)

Question 43

What is Per Capita GDP?

Answer 43

GDP/Population; it is a broad indicator of general living standards.