chapter 9

Question 1

In the question, “How much value is created in a year?” the words “value is created” could be replaced by which phrase?

Answer 1

how much “income is earned” in a year.

Question 2

True, false, explain: Wealth and income are the same thing

Answer 2

False. Income is a flow that reflects value creation. Wealth is a stock of what you own, which is accumulated savings from past income earned

Question 3

True, false, explain: We actually measure income as the social gain from production.

Answer 3

False. Though the true measure of income is social gain, we measure how much is paid for output that is produced.

Question 4

define GDP

Answer 4

GDP is the market value value of all final goods and services produced within a country’s borders in one year. Tells us how big an economy is.

Question 5

GDP does NOT include..

Answer 5

intermediate goods

Question 6

What is a final good?

Answer 6

A good that is sold to a final customer. Is counted in GDP.

Question 7

wealth

Answer 7

Wealth is a stock. includes all of your bank account and assets. Like a lake.

Question 8

Income

Answer 8

income is a flow. How much your paycheck is. like a river.

Question 9

What is one thing not counted in GDP?

Answer 9

a social security check.

Question 10

True, false, explain: The value of crystal meth production is not included in US GDP.

Answer 10

True. Because we do not have reliable records of the production.

Question 11

True, false, explain: Sales of used goods are not counted in GDP.

Answer 11

True. Because they have been previously counted, so to count them again would double count them.

Question 12

True, false, explain: The value of a newly issued share of stock is counted in GDP.-

Answer 12

False. The money that comes from the stock sale will purchase capital, and to count both transactions would double count.

Question 13

Transfer payments

Answer 13

taking from one person and giving to another, but not in return for any goods or services, such as SS unemployment insurance checks, and food stamps. NOT counted in GDP

Question 14

What are two approaches to calculating GDP?-

Answer 14

?- The expenditure approach and the income approach.

Question 15

Which approach does government use in calculating GDP. Why?

Answer 15

The income approach–because tax records give information about income.

Question 16

Expenditure approach

Answer 16

Used by media and most referenced gov’t reports. Add up the current market values of all final goods and services.

Question 17

Income approach

Answer 17

how Gov’t statistics are actually calculated. adds up all the payments to factors of production generated by production.

Question 18

Which is bigger, the dollar value of output produced in the economy or the dollar value of income earned in the economy? Why?

Answer 18

They are equal, because every penny gained from the sale of a final good is income for someone in the production process

Question 19

What are the four components of the expenditure approach?

Answer 19

Consumption, investment, government purchases, net exports.

Question 20

Of the four components of GDP as measured by the expenditure approach, which is largest, second largest, and third largest?

Answer 20

In order: Consumption, Government purchases, Investment, Net Exports

Question 21

What is the definition of Investment as regards the expenditure approach to GDP?-

Answer 21

Production of capital goods, production of new residential housing, changes in inventories

Question 22

True, false, explain: We measure Real GDP in order to reflect the fact that though illegal goods may destructive, they have value to those who buy them.

Answer 22

False. We measure Real GDP to adjust for inflation.

Question 23

Consumption

Answer 23

spending by consumers on nondurable goods, durable goods, and services.

Question 24

Investment

Answer 24

spending by businesses on capital (PPE), changes in business inventories, and spending on new residential housing. Does not mention stocks or bonds.

Question 25

Gov’t purchases

Answer 25

spending by all levels of government on goods and services. Transfer payments do not fit this definition.

Question 26

net exports

Answer 26

exports-imports.

Question 27

Real GDP

Answer 27

It is what GDP would be if prices were the same as they had been in the base year

Question 28

Since we have Real GDP, why would we ever want to use nominal GDP?-

Answer 28

As long as we are not comparing values of different numbers across time, where inflation could occur, there is nothing to gain from using nominal GDP.

Question 29

The reason we use Real GDP is to

Answer 29

remove the effects of inflation from the GDP measure

Question 30

What is the definition of economic growth?

Answer 30

the percentage change in Real GDP over a year’s time

Question 31

A very strong growth rate for the economy is

Answer 31

over 3.5%

Question 32

True, false, explain: We would be pleased to find out we are at a peak of economic activity.

Answer 32

False. That means we are about to contract.

Question 33

What is the definition of a recession?-

Answer 33

Two successive quarterly declines in Real GDP.

Question 34

Compare the 1982 recession and recovery to the latest recession and recovery

Answer 34

The 1982 recession was as bad or worse than the latest recessions, but the recovery in 1982 was much stronger.

Question 35

What is the definition of per capita GDP? If we know this number, what does it tell us about the economy (other than the definition)?

Answer 35

GDP/population. It tells us how well off the people in the economy are.

Question 36

business cycle

Answer 36

describes the ups and downs of the economy

Question 37

Since the recession began in 2008, economic growth has been about

Answer 37

2%

Question 38

Over the past 6 decades, the US has spent approximately

Answer 38

10% of the time in recession

Question 39

True, false, explain: When we look a graph of five decades of GDP per capita we see that the average person is now worse off than before

Answer 39

False. Wellbeing generally improves over time.

Question 40

True, false, explain: The US is not the highest ranked country in terms of economic freedom, but its economic freedom index is rising.

Answer 40

False. The US is not the highest ranked country, and its ranking has fallen for the past five years.

Question 41

True, false, explain: If China had a higher economic growth rate than the US, that would mean that it would be a better place to live than the U. S.

Answer 41

False. Growth rates tell one the direction of the economy. GDP per capita is the best measure of living standards.

Question 42

True, false, explain: Since China is growing better than the US, they currently have better economic policies than the US.-

Answer 42

.- False. Growth also depends on the direction of policy. If China’s policies are worse than the US, but are improving, they might have higher growth than the US.

Question 43

China’s recent growth is likely the result of having found

Answer 43

the best policy directions