Chapter 21 - Measuring the Size of the Economy: Gross Domestic Product

question

GDP (Gross Domestic Product)

answer

the market value of the final goods and services produced within a country in a given time period

question

market values

answer

the prices at which items are traded in markets

question

final good/service

answer

an item that is bought by its final user during a specific time period; ex: a Ford truck

question

intermediate good/service

answer

an item that is produced by one firm, bought by another firm, and used as a component of a final good or service; ex: a Firestone tire on a Ford truck

question

double counting

answer

what occurs when you add the value of intermediate goods and services produced to the value of final goods and services

question

GDP = a measure of what?

answer

total production

question

We can measure total production by either _______ or __________?

answer

total income earned producing GDP or the total expenditure on GDP

question

Elements of the circular flow model

answer

households, goods markets, firms, factor markets, governments, and the rest of the world

question

Role of households in the circular flow model

answer

Sell the services of labor, capital, and land in factor markets, getting paid by firms for wages for labor services, interest for the use of capital, and rent for the use of land; these also buy consumer goods and services in goods markets

question

firms' retained earnings

answer

profits that are not distributed to households; part of the household sector's income; income that households save and lend back to firms

question

what happens in factor markets?

answer

households sell and firms buy the services of labor, capital, and land

question

what happens in goods markets?

answer

firms sell and households buy consumer goods and services; firms buy and sell new capital equipment; governments buy goods and services from firms; rest of the world imports and exports

question

consumption expenditure

answer

the total payment for goods and services sold by firms and bought by households in goods markets

question

Role of Firms in Circular Flow Model

answer

pay income to households in factor markets (Y); retain earnings (go into household sector's income); sell consumer goods in goods markets; buy and sell new capital equipment in goods markets

question

inventory

answer

what firms produce but don't sell; counted as investment in that it's like the firm buying goods from itself

question

investment

answer

the purchase of new plant, equipment, and buildings, and the additions to inventories; labeled I

question

government expenditure

answer

government purchases of goods and services from firms; does NOT include taxes and financial transfers like Social Security or unemployment benefits

question

role of the rest of the world in the circular flow of income

answer

exports + imports

question

exports

answer

firms in the US sell goods and services to the rest of the world in goods markets

question

imports

answer

firms in the United States buy goods and services from the rest of the world in goods markets

question

net exports

answer

the value of exports (X) minus the value of imports (M); X - M

question

if net exports is positive, then _______

answer

the net flow is from the US to the rest of the world

question

if net exports is negative, then ________

answer

the net flow is from the rest of the world to the US firms

question

total expenditure/aggregate expenditure

answer

one method of measuring GDP; equals consumption expenditure + investment + government expenditure + net exports

question

aggregate income

answer

the total amount paid for the services of the factors of production used to produce final goods and services; wages, interest, rent, and profit

question

domestic vs. national product

answer

domestic = production within a country

national = the value of goods and services produced anywhere in the world by residents of a nation

question

GNP = ?

answer

GDP + net income from factors of production owned in other countries

question

Gross

answer

before subtracting the depreciation of capital

question

net

answer

after subtracting the depreciation of capital

question

depreciation

answer

the decrease in the value of a firm's capital that results from wear and tear and obsolescence

question

gross investment

answer

the total amount spent both buying new capital and replacing depreciated capital

question

net investment

answer

the amount by which the value of capital increases; gross investment - depreciation

question

gross profit

answer

a firm's profit before subtracting depreciation; one of the incomes included in the income approach to measuring GDP

question

The expenditure approach/method

answer

the sum of consumption expenditure (C), investment (I), government expenditure on goods and services (G), and net exports of goods and services (X-M); (red flows on page 499)

question

personal consumption expenditure

answer

the red flow C on page 499; the expenditures by US households on goods and services produced in the US and in the rest of the world; goods like soda/books and services like banking and legal advice;

question

Where do the purchases of new houses go?

answer

NOT personal consumption expenditures, but rather, as a part of investment

question

gross private domestic investment

answer

the red flow I; expenditure on capital equipment and buildings by firms and the additions to business inventories; also includes expenditures on new homes by households

question

the income approach/method

answer

measures GDP by summing the incomes that firms pay households for the services of the factors of production they hire (wages for labor, interest for capital, rent for land, and profit for entrepreneurship)

question

compensation of employees

answer

(flow W on page 500); the payment for labor services; includes net wages and salaries (which are combined to "take-home pay") that workers receive plus taxes withheld on earnings, plus fringe benefits like Social Security and pension fund contributions

question

OFI

answer

net interest, rental income, corporate profits, and proprietors' income; included in income approach

question

net domestic income at factor cost

answer

the cost of factors of production used to produce final goods; sum of OFI and compensation of employees (expenditures on final goods are valued at market prices, which differ from factor cost because of indirect taxes and subsidies)

question

indirect tax

answer

a tax such as a sales tax or a tax on gasoline

question

market price includes ________, so ______?

answer

indirect taxes; so they make price exceed factor cost

question

subsidies make market price ________ than factor cost

answer

less than

question

To get from factor cost to market price, what do you do? How do you get net domestic income at market price?

answer

add indirect taxes and subtract subsidies to get net domestic income at market price

question

How to get from net income to gross income

answer

add depreciation

question

the gap between the two measures of GDP is what?

answer

statistical discrepancy; exists because all of the numbers are estimates

question

What to add to get GDP through the expenditure approach?

answer

personal consumption expenditures + gross private domestic investment + government expenditures on goods and services + net exports of goods and services

question

What to add to get GDP through the income method?

answer

compensation of employees + net interest + rental income + corporate profits + proprietor's income = net domestic income at factor cost

add net domestic income at factor cost to indirect taxes less subsidies to get net domestic income at market prices

add depreciation to net domestic income at market price

question

Real GDP

answer

the value of final goods and services produced in a given year when valued at the prices of a reference base year; reveals the change in production

question

nominal GDP

answer

the value of final goods and services produced in a given year when valued at the prices of that year

question

Calculating Real GDP

answer

For the base year, the real and nominal GDP is the same thing; calculate total expenditure in base year and then total expenditure in year you're comparing using the prices of the base year.

question

Main purposes for estimates of GDP

answer

to compare the standard of living over time and across countries

question

One method of comparing the standard of living over time is to ________?

answer

calculate real GDP per person in different years

question

Real GDP per person

answer

real GDP divided by the population; tells us the value of goods and services that the average person can enjoy; because it's real, we remove any influence that rising prices and a rising cost of living might have

question

Long-term trends in US real GDP

answer

real GDP per person in the US doubled between 1960 and 1988 and tripled between 1960 and 2016

question

potential GDP

answer

the maximum level of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurial ability that would bring rising inflation; is steady but not constant

question

Lucas wedge

answer

the dollar value of the accumulated gap between what real GDP per person would have been if the 1960s growth rate had persisted and what real GDP per person turned out to be; arose from the slow-down of productivity growth that began in the 1970s

question

the business cycle

answer

the fluctuations in the pace of expansion of real GDP; a periodic but irregular up-and-down movement of total production and other measures of economic activity

question

Two phases of the business cycle

answer

expansion and recession

question

two turning points in the business cycle

answer

peak and trough

question

expansion

answer

a period during which real GDP increases; in the early stages of this phase, real GDP returns to potential GDP and eventually exceeds potential GDP

question

recession

answer

a period during which real GDP decreases (has a negative growth rate) for at least two successive quarters

question

an expansion ends and a recession begins when?

answer

at the peak, or the highest level that real GDP has attained up to that time

question

a recession ends when?

answer

a a trough, when real GDP reaches a temporary low point and from which the next expansion

question

Problems in Using real GDP across countries

answer

must convert the currencies and must be evaluated at the same prices

question

market exchange rate

answer

the rate at which one currency will be exchanged for another. It is also regarded as the value of one country's currency in relation to another currency.

question

limitations to using GDP as a measure of standard of living (what it doesn't include that influences the standard of living)

answer

household production, underground economic activity, leisure time, and environmental quality

question

The omission of household production from GDP means that GDP does what to total production?

answer

underestimates total production and overestimates the growth rate of total production because some of the growth rate of market production (included in GDP) is a replacement for home production

question

underground economy

answer

the part of the economy that is purposefully hidden from the view of the government to avoid taxes and regulations or because the goods and services being produced are illegal; omitted from GDP

question

leisure time

answer

an economic good that adds to our economic well-being and the standard of living--the more leisure time, the better off we are

question

environmental quality

answer

while the resources used to protect the environment are valued as part of GDP, the cost of pollution is not subtracted from GDP

question

time-series graph

answer

measures time (in years, quarters, or months) on the x-axis and the variable or variables in which we are interested on the y-axis

question

cycle

answer

a tendency for a variable to alternate between upward and downward movements

question

trend

answer

a tendency for a variable to move in one general direction

question

Many macroeconomic variables like GDP and the average level of prices, have a ________ trend?

answer

upward

question

ratio scale

answer

intervals between measurements on the y axis aren't equal: for example, the vertical distance between 100 and 200 is greater than the distance between 300 and 400, showing that the variable is increasing at a decreasing rate over time

question

Chained-dollar real GDP

answer

The measure of real GDP calculated by the Bureau of Economic Analysis; three steps from textbook on pages 512-513 to explain in detail the process, but the three steps are 1) value production in the prices of adjacent years 2) find the average of the two price changes and 3) link (chain) back to the reference year

1 of 78

question

GDP (Gross Domestic Product)

answer

the market value of the final goods and services produced within a country in a given time period

question

market values

answer

the prices at which items are traded in markets

question

final good/service

answer

an item that is bought by its final user during a specific time period; ex: a Ford truck

question

intermediate good/service

answer

an item that is produced by one firm, bought by another firm, and used as a component of a final good or service; ex: a Firestone tire on a Ford truck

question

double counting

answer

what occurs when you add the value of intermediate goods and services produced to the value of final goods and services

question

GDP = a measure of what?

answer

total production

question

We can measure total production by either _______ or __________?

answer

total income earned producing GDP or the total expenditure on GDP

question

Elements of the circular flow model

answer

households, goods markets, firms, factor markets, governments, and the rest of the world

question

Role of households in the circular flow model

answer

question

firms' retained earnings

answer

profits that are not distributed to households; part of the household sector's income; income that households save and lend back to firms

question

what happens in factor markets?

answer

households sell and firms buy the services of labor, capital, and land

question

what happens in goods markets?

answer

firms sell and households buy consumer goods and services; firms buy and sell new capital equipment; governments buy goods and services from firms; rest of the world imports and exports

question

consumption expenditure

answer

the total payment for goods and services sold by firms and bought by households in goods markets

question

Role of Firms in Circular Flow Model

answer

pay income to households in factor markets (Y); retain earnings (go into household sector's income); sell consumer goods in goods markets; buy and sell new capital equipment in goods markets

question

inventory

answer

what firms produce but don't sell; counted as investment in that it's like the firm buying goods from itself

question

investment

answer

the purchase of new plant, equipment, and buildings, and the additions to inventories; labeled I

question

government expenditure

answer

government purchases of goods and services from firms; does NOT include taxes and financial transfers like Social Security or unemployment benefits

question

role of the rest of the world in the circular flow of income

answer

exports + imports

question

exports

answer

firms in the US sell goods and services to the rest of the world in goods markets

question

imports

answer

firms in the United States buy goods and services from the rest of the world in goods markets

question

net exports

answer

the value of exports (X) minus the value of imports (M); X - M

question

if net exports is positive, then _______

answer

the net flow is from the US to the rest of the world

question

if net exports is negative, then ________

answer

the net flow is from the rest of the world to the US firms

question

total expenditure/aggregate expenditure

answer

one method of measuring GDP; equals consumption expenditure + investment + government expenditure + net exports

question

aggregate income

answer

the total amount paid for the services of the factors of production used to produce final goods and services; wages, interest, rent, and profit

question

domestic vs. national product

answer

domestic = production within a country

national = the value of goods and services produced anywhere in the world by residents of a nation

question

GNP = ?

answer

GDP + net income from factors of production owned in other countries

question

Gross

answer

before subtracting the depreciation of capital

question

net

answer

after subtracting the depreciation of capital

question

depreciation

answer

the decrease in the value of a firm's capital that results from wear and tear and obsolescence

question

gross investment

answer

the total amount spent both buying new capital and replacing depreciated capital

question

net investment

answer

the amount by which the value of capital increases; gross investment - depreciation

question

gross profit

answer

a firm's profit before subtracting depreciation; one of the incomes included in the income approach to measuring GDP

question

The expenditure approach/method

answer

the sum of consumption expenditure (C), investment (I), government expenditure on goods and services (G), and net exports of goods and services (X-M); (red flows on page 499)

question

personal consumption expenditure

answer

the red flow C on page 499; the expenditures by US households on goods and services produced in the US and in the rest of the world; goods like soda/books and services like banking and legal advice;

question

Where do the purchases of new houses go?

answer

NOT personal consumption expenditures, but rather, as a part of investment

question

gross private domestic investment

answer

the red flow I; expenditure on capital equipment and buildings by firms and the additions to business inventories; also includes expenditures on new homes by households

question

the income approach/method

answer

question

compensation of employees

answer

question

OFI

answer

net interest, rental income, corporate profits, and proprietors' income; included in income approach

question

net domestic income at factor cost

answer

question

indirect tax

answer

a tax such as a sales tax or a tax on gasoline

question

market price includes ________, so ______?

answer

indirect taxes; so they make price exceed factor cost

question

subsidies make market price ________ than factor cost

answer

less than

question

To get from factor cost to market price, what do you do? How do you get net domestic income at market price?

answer

add indirect taxes and subtract subsidies to get net domestic income at market price

question

How to get from net income to gross income

answer

add depreciation

question

the gap between the two measures of GDP is what?

answer

statistical discrepancy; exists because all of the numbers are estimates

question

What to add to get GDP through the expenditure approach?

answer

personal consumption expenditures + gross private domestic investment + government expenditures on goods and services + net exports of goods and services

question

What to add to get GDP through the income method?

answer

question

Real GDP

answer

the value of final goods and services produced in a given year when valued at the prices of a reference base year; reveals the change in production

question

nominal GDP

answer

the value of final goods and services produced in a given year when valued at the prices of that year

question

Calculating Real GDP

answer

For the base year, the real and nominal GDP is the same thing; calculate total expenditure in base year and then total expenditure in year you're comparing using the prices of the base year.

question

Main purposes for estimates of GDP

answer

to compare the standard of living over time and across countries

question

One method of comparing the standard of living over time is to ________?

answer

calculate real GDP per person in different years

question

Real GDP per person

answer

question

Long-term trends in US real GDP

answer

real GDP per person in the US doubled between 1960 and 1988 and tripled between 1960 and 2016

question

potential GDP

answer

the maximum level of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurial ability that would bring rising inflation; is steady but not constant

question

Lucas wedge

answer

question

the business cycle

answer

the fluctuations in the pace of expansion of real GDP; a periodic but irregular up-and-down movement of total production and other measures of economic activity

question

Two phases of the business cycle

answer

expansion and recession

question

two turning points in the business cycle

answer

peak and trough

question

expansion

answer

a period during which real GDP increases; in the early stages of this phase, real GDP returns to potential GDP and eventually exceeds potential GDP

question

recession

answer

a period during which real GDP decreases (has a negative growth rate) for at least two successive quarters

question

an expansion ends and a recession begins when?

answer

at the peak, or the highest level that real GDP has attained up to that time

question

a recession ends when?

answer

a a trough, when real GDP reaches a temporary low point and from which the next expansion

question

Problems in Using real GDP across countries

answer

must convert the currencies and must be evaluated at the same prices

question

market exchange rate

answer

the rate at which one currency will be exchanged for another. It is also regarded as the value of one country's currency in relation to another currency.

question

limitations to using GDP as a measure of standard of living (what it doesn't include that influences the standard of living)

answer

household production, underground economic activity, leisure time, and environmental quality

question

The omission of household production from GDP means that GDP does what to total production?

answer

underestimates total production and overestimates the growth rate of total production because some of the growth rate of market production (included in GDP) is a replacement for home production

question

underground economy

answer

the part of the economy that is purposefully hidden from the view of the government to avoid taxes and regulations or because the goods and services being produced are illegal; omitted from GDP

question

leisure time

answer

an economic good that adds to our economic well-being and the standard of living--the more leisure time, the better off we are

question

environmental quality

answer

while the resources used to protect the environment are valued as part of GDP, the cost of pollution is not subtracted from GDP

question

time-series graph

answer

measures time (in years, quarters, or months) on the x-axis and the variable or variables in which we are interested on the y-axis

question

cycle

answer

a tendency for a variable to alternate between upward and downward movements

question

trend

answer

a tendency for a variable to move in one general direction

question

Many macroeconomic variables like GDP and the average level of prices, have a ________ trend?

answer

upward

question

ratio scale

answer

question

Chained-dollar real GDP

answer

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order

Chapter 21 – Measuring the Size of the Economy: Gross Domestic Product

Order an Essay Now & Get These Features For Free: