1 of 22 9/24/2013 2:14 PM

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1 1 of 22 9/24/2013 2:14 PM National income accounts assist Market investors in making more profitable investments. Individuals in maximizing their incomes. Economic policy makers in formulating policies and evaluating performance. Analysts in measuring the performance of the stock market. National income is one way to calculate an economy's well-being. GDP can be calculated by all of the following methods except Adding up the spending on goods and services by business, government, households, and foreigners, and subtracting imports. Adding up the "value added" at every stage of production in the economy. Adding up all of the receipts of households, government, and business. Adding up all income and expenses by consumers and businesses. GDP can be measured through total expenditures, total income, or total value added. Suppose iphones cost consumers $200 and USB cables cost consumers $25. What contribution does the production of 2,000 iphones and 1,200 USB cables make to GDP? $1,200,000. $430,000. $200,000. $580,000. GDP represents the total value of production in the economy at current market prices. In this case, the value would be $430,000 = (200 2, ,200). Difficulty: 3 Hard

2 2 of 22 9/24/2013 2:14 PM Suppose Blu-Ray players cost consumers $300 and Blu-Ray disks cost consumers $30. What contribution does the production of 250 Blu-Ray players and 3,000 Blu-Ray disks make to the GDP? $75,000. $165,000. $90,000. $125,000. The total production of each product multiplied by the price of each product, then added together, is the value of GDP. In this example GDP is equal to $165,000 = ( ,000). Difficulty: 3 Hard Which of the following is treated differently in computations of GNP as compared with GDP? Sales in the underground economy. Goods produced by U.S. firms located in foreign countries. Intermediate goods. The value of services performed by housewives. GDP includes production within the political borders, while GNP measures production by U.S.-owned factors of production regardless of where they may be located. Which of the following would be included in U.S. GNP but not in U.S. GDP? The tips received by a waiter in New Jersey. Auto parts produced by a Japanese-owned firm operating in North Carolina. Sales of used cars in the United States. Chipsets produced by U.S.-owned firms operating in China. To count in U.S. GDP, something must be produced within the borders of the United States.

3 3 of 22 9/24/2013 2:14 PM If GDP grows more rapidly than population for a particular country over a period of time, then we can determine that Real GDP has decreased. All citizens of this country are better off. GDP per capita has increased. GDP must rise at a slower rate in the future. GDP per capita is influenced by growth in GDP and growth in the population. Which of the following is excluded from calculations of GDP? Goods that are produced but not sold during the time period. Income received by managers of corporations. The value of lawn mowing provided by a teenager for his own family. Goods that bring little value to society. Nonmarket production is excluded from GDP. Suppose a friend claims he is helping the economy by throwing trash on the street rather than in trash cans because the extra expenditures necessary to clean up the streets will increase GDP. Your friend is Wrong. GDP will not be affected because nothing new is being produced. Right. GDP will increase, ceteris paribus. Wrong. GDP will not be affected because this is not a socially desirable use of resources and will therefore not be included in GDP. Wrong. GDP will decline because the neighborhood will be less clean. Even wasteful spending on waste removal is a final service and technically causes real GDP to rise.

4 4 of 22 9/24/2013 2:14 PM Which of the following is directly included in the calculation of GDP? The final sale of a brand new Cadillac. The appreciation in value of shares of stock. The sales of sand to a glassmaker. The sales of land to a builder. Final goods count in GDP but used, intermediate, and financial goods do not. Difficulty: 1 Easy When an individual makes repairs to her own home instead of hiring a company to make the repairs, the activity is Included in GDP because it represents production. Productive but excluded from GDP because it is a nonmarket activity. Excluded from GDP because it is an intermediate good. Included in GDP but not included in GNP. If an individual uses his or her own time to make improvements rather than hiring a company, then the activity will not be counted in GDP. Which of the following is not a final good or service? A refrigerator purchased by a home owner. Paper purchased by a textbook company. A computer purchased by a local middle school. A flu shot purchased by a teacher. The paper purchased by the textbook company is an intermediate good used in producing the textbook.

5 5 of 22 9/24/2013 2:14 PM A furniture factory produces dining room sets. The lumber it purchases from the lumberyard is a/an Intermediate service. Final good. Intermediate good. Final service. Any good used in the production of a final good is considered to be an intermediate good. If one added up the value of all intermediate goods that went into the production of real GDP, the total value of intermediate goods would be Less than the GDP. Equal to the GDP. Greater than the GDP. None of the choices are correct. By adding up the contribution of all stages of production, you are double-counting and thereby overstating actual GDP. By adding up the "marginal" contribution you get an accurate measure of real GDP. Difficulty: 1 Easy A computer manufacturer sells laptops to retail stores for $450 each. If the manufacturer pays $200 for the components in each laptop and $75 in wages, the value added to each computer by manufacturing is $450. $250. $175. $75. Value added is simply selling price of output minus cost of physical inputs. A computer, and the physical computer parts to make the computer, has the same weight. The computer parts are bought for $200 and sold in a different value-added format as a computer for $450. The actual value added of assembly is $250. The wage cost of $75 is inside the value-added component of $250. Difficulty: 3 Hard

6 6 of 22 9/24/2013 2:14 PM A convenience store pays a farmer $1.25 per pineapple. If it costs the farmer $0.15 in seeds, $0.25 in fertilizer, and $0.25 in forgone output to grow each pineapple, the value added by the farmer to each pineapple is $0.40. $1.25. $0.85. $0.60. Value added is equal to the sale price less any explicit intermediate input prices required to produce the good. Difficulty: 3 Hard If a farmer grows a head of cabbage with fertilizer costs of $0.10 and seed costs of $0.15 and sells it to a wholesaler for $0.55, the total value added by the farmer is $0.30. $0.25. $0.55. $0.35. Value added is equal to the sale price less any explicit input prices required to produce the good. Difficulty: 3 Hard Suppose the total market value of all the final goods and services produced in the country of Rushya was $8 billion in 2008 (measured in 2008 prices) and $9 billion in 2009 (measured in 2009 prices). Which of the following statements is definitely correct? Production increased in Rushya between 2008 and Real GDP increased in Rushya between 2008 and Average price levels increased in Rushya between 2008 and Whether real GDP increased cannot be determined with the information given. Nominal GDP can increase if either real GDP or the price level increases, but it is impossible to know with certainty whether one or both of these increased from 2008 to Difficulty: 3 Hard Learning Objective: The difference between real and nominal GDP.

7 7 of 22 9/24/2013 2:14 PM If nominal GDP was $11,500 billion in 2003 and the price level in 2003 was 111.6, then real GDP would have been approximately $9,795 billion. $10,305 billion. $10,485 billion. $9,750 billion. Nominal GDP can be adjusted to remove changes to the price level, which is what real GDP is used for. Real GDP is equal to nominal GDP divided by the price index and multiplied by 100: ($11,500/111.6) 100. Learning Objective: The difference between real and nominal GDP. If the price level is 100 for 2005 and the price level is in 2007, a nominal GDP in 2007 of $15,600 billion would mean that real GDP in 2007 (in 2005 prices) would be closest to $14,647.9 billion. $15,600.0 billion. $14,751.3 billion. $13,971.2 billion. Real GDP takes into account changes in the price level so that we are looking only at changes in actual production. Real GDP is equal to nominal GDP divided by the price index and multiplied by 100: ($15,600/106.5) 100. Learning Objective: The difference between real and nominal GDP. Assume nominal GDP is $10,000 billion in period 1 and $15,000 billion in period 2. If prices in period 2 are twice as high as in period 1, real GDP in period 2 is $10,000 measured in period 1 prices. $12,500 measured in period 1 prices. $15,000 measured in period 1 prices. $7,500 measured in period 1 prices. Real GDP will be lower than nominal GDP if the price level is increasing faster than production is. Real GDP is equal to nominal GDP divided by the price index and multiplied by 100: ($15,000/200) 100. Learning Objective: The difference between real and nominal GDP.

8 8 of 22 9/24/2013 2:14 PM If real GDP in 2005 is $8,000 billion and the price level is 125, what is nominal GDP in 2005? $10,000.0 billion $9,200.5 billion $6,830.6 billion $5,000.0 billion Nominal GDP is equal to real GDP multiplied by the price index and divided by 100: (8, )/100. Learning Objective: The difference between real and nominal GDP.

9 9 of 22 9/24/2013 2:14 PM According to the hypothetical economy in Figure 5.1, between 1960 and 1970 real GDP declined but nominal GDP continued to rise. The increase in nominal GDP was due to An increase in the price level greater than the decrease in output, causing the nominal dollar value of output produced to increase. An increase in the quantity of output produced. A decrease in the price level. An increase in the standard of living. Nominal GDP can suggest the economy is doing well, but it could be a distortion since the growth may be due to an increase in the price level only. Learning Objective: The difference between real and nominal GDP.

10 10 of 22 9/24/2013 2:14 PM In Figure 5.1, during the period between the early 1970s and 1980, real GDP grew at a faster rate than nominal GDP. This is an indication that Average price levels decreased. Production increased at a faster rate than average price increased. Production increased at a slower rate than average price increased. Average price levels increased. Nominal GDP can grow more slowly than real GDP if the prices are falling and production is rising; the economy is actually doing well, but nominal GDP suggests it is not. Learning Objective: The difference between real and nominal GDP.

11 11 of 22 9/24/2013 2:14 PM In Figure 5.1, during the time periods, real GDP was relatively constant but nominal GDP increased. This can be explained by Lower average price levels. Inflation. Higher levels of production. A decrease in production per capita. Real GDP can be constant and nominal GDP can be increasing. But this must be due to a change in the price level and not actual production. Learning Objective: The difference between real and nominal GDP.

12 12 of 22 9/24/2013 2:14 PM The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is closest to In the base year, nominal GDP equals real GDP since both are expressed using the same-year dollars. Learning Objective: The difference between real and nominal GDP.

13 13 of 22 9/24/2013 2:14 PM Depreciation represents The consumption of capital in the production process. A loss of productive capability as a result of the inefficient use of resources. Wasted capital. Gross investment plus net investment. Every year, some capital wears out and must be replaced in order to maintain our current standard of living. Difficulty: 1 Easy The wearing out of plants and equipment is known as Net domestic product. Depreciation. Inflation. Chain-weighted adjustment. Since capital has a finite life, a portion of the capital stock wears out each year and must be replaced to maintain our standard of living. Difficulty: 1 Easy Gross investment is the Expenditure on new plants, equipment, and residential construction, plus changes in business inventories. Consumption of capital in the production process. Wearing out of plant and equipment. Alternative combinations of final goods and services that can be produced with all available resources and technology. Businesses invest in the economy by increasing the amount of physical capital. Difficulty: 1 Easy

14 14 of 22 9/24/2013 2:14 PM An economy's production possibilities are most likely to expand if Net investment is negative. Net investment is zero. Gross investment is greater than depreciation. Depreciation is greater than gross investment. Depreciation represents capital that is worn out; if it is replaced through investment, and there is additional investment above that, then our production possibilities will increase. A nation's production possibilities curve should, ceteris paribus, shift Inward if gross investment exceeds depreciation. Inward if net investment is zero. Outward if net investment is positive. Outward if gross investment is positive. As long as our gross investment is more than enough to replace worn-out capital and build new capital, our production possibilities will increase. If depreciation is smaller than gross investment, Net investment exceeds depreciation. Gross investment is negative. Net investment is positive. The nation's capital stock is getting smaller. Gross investment is positive as long as some new plants and equipment are being produced. But the stock of capital the total collection of plants and equipment won't grow unless gross investment exceeds depreciation. That is, the flow of new capital must exceed depreciation, or our stock of capital will decline.

15 15 of 22 9/24/2013 2:14 PM If depreciation exceeds gross investment, Net investment exceeds depreciation. Gross investment is negative. The difference between GDP and NDP is smaller than gross investment. The nation's capital stock is being depleted. Gross investment is positive as long as some new plants and equipment are being produced. But the stock of capital the total collection of plants and equipment won't grow unless gross investment exceeds depreciation. That is, the flow of new capital must exceed depreciation, or our stock of capital will decline. If for a given year gross investment is $300 billion and depreciation is $75 billion, then, for that year, the capital stock and net investment was. Increased by $250 billion; $225 billion Increased by $225 billion; $225 billion Decreased by $225 billion;$300 billion Decreased by $300 billion; $300 billion The capital stock will grow when gross investment is greater than depreciation; net investment equals gross investment minus depreciation. Difficulty: 3 Hard Which of the following typically purchases the most goods and services in the U.S. economy? Foreigners. Households. Federal, state and local governments combined. Businesses. Consumer spending in the United States is by far the largest share of total spending. Difficulty: 1 Easy

16 16 of 22 9/24/2013 2:14 PM Which of the following expenditures are included in consumption? Police services. Medical services. Public highways. Public parks. Consumption is spending by households directly on goods and services. The economic definition of investment includes all of the following except Residential construction. Net changes in business inventory. Spending for plants and capital equipment. A retirement portfolio of stocks and bonds. In economics, the term "investment" does not describe how one chooses to allocate one's wealth among asset classes.

17 17 of 22 9/24/2013 2:14 PM According to the economy in Figure 5.3, net exports Made a positive contribution to GDP from 1990 to Were a positive number from 1970 to Increased the size of GDP from 1970 to Remained constant from 1990 to Net exports increase our GDP when they are positive because it means that we're producing (and selling) more goods to the rest of the world than they're buying from us.

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19 19 of 22 9/24/2013 2:14 PM According to the economy in Figure 5.3, net exports Were a negative number from 1990 to Were a negative number from 1970 to Made a positive contribution to GDP from 1970 to Did not impact GDP from 1990 to 2000 because exports were greater than imports. When imports exceed exports, net exports will be negative.

20 20 of 22 9/24/2013 2:14 PM National income is a measure of How well the economy is doing on a gross basis. The income earned by the factors of production in producing GDP. The income received by the factors of production plus depreciation. The country's future productive capacity. National income is the flip side of national production. Difficulty: 1 Easy Transfer payments are part of personal income but not national income because They are a payment for which no goods or services are exchanged. Personal income is an earnings concept. National income is a receipts concept. They represent a payment to factors of production. National income is an efficiency concept with market exchange and thereby does not include transfer payments. Transfer payments are government actions to influence inequity. Transfer payments are added to national income to get personal

21 21 of 22 9/24/2013 2:14 PM On the basis of Table 5.1, gross domestic product is $6,980 billion. $7,635 billion. $6,810 billion. $7,720 billion. GDP can be obtained by adding C + I + G + (X - M). $4,565 + $865 + $1,465 + ($740 - $825).

22 22 of 22 9/24/2013 2:14 PM On the basis of Table 5.1, personal income is $5,620 billion. $5,790 billion. $6,530 billion. $6,445 billion. Personal income equates to the GDP ($4,565 + $865 + $1,465 + ($740 - $825)) minus depreciation ($640) plus transfer payments and net foreign factor income and net interest payments to households ($690 + $20 + $0). This result is subtracted by indirect business taxes and Social Security taxes, corporate income taxes, and corporate retained earnings ($520 + $510 + $185 + $45).