BEC - Gross Measures - Economic Activity Flashcards
Potential GDP is a measure of an economy’s ability to produce goods and services. Which of the following is assumed in estimating potential GDP?
A. Price levels are stable; there is no inflation or deflation. B. Imports and exports are at equal amounts. C. All labor is being fully and efficiently used. D. Real GNP is equal to potential GNP.
C.
All labor is being fully and efficiently used
Potential GDP is a measure of the maximum amount of goods and services an economy can produce at a given time, assuming available technology and full utilization of available economic resources, including labor.
The following information is available for economic activity for year 1:
In billions
Financial transactions $60
Second-hand sales 50
Consumption by households 40
Investment by businesses 30
Government purchases of goods and services 20
Net exports 10
What amount is the gross domestic product for year 1?
A. $210 billion. B. $160 billion. C. $100 billion. D. $90 billion.
C. $100 billion.
Gross domestic product (GDP) is the total output of final goods and services produced during a period. It can be measured using either the expenditures approach or the income approach. The information provided permits GDP to be measured using the expenditures approach, which is the sum of:
Consumption by individuals/households $40B
Investment by businesses 30
Government purchases 20
Net exports (net purchases by foreign buyers) 10
Total Expenditures (GDP) $100B
Gross Domestic Product (GDP)
The total output of final goods and services produced during a period. It can be measured using either the expenditures approach or the income approach.
Financial transactions are not included in GDP; Net exports are included in GDP.
A positive gross domestic product (GDP) gap exists when A. Real GDP exceeds nominal GDP. B. Nominal GDP exceeds real GDP. C. Real GDP exceeds potential GDP. D. Nominal GDP exceeds potential GDP.
C. Real GDP exceeds potential GDP.
The GDP gap is a measure of the difference between potential GDP and real GDP. Potential GDP is the maximum production of final goods and services that is possible in the economy without putting upward pressure on the general level of prices. Real GDP is the market value of all final goods and services actually produced, adjusted for changes in the price level, that is, in terms of constant prices of a base period.
The gap between real GDP and potential GDP is positive when real GDP exceeds potential GDP and negative when potential GDP exceeds real GDP. Furthermore, a negative GDP gap indicates that the economy is operating at less than full capacity, which implies unemployment and under-utilized plant and equipment.
Conversely, a positive GDP gap indicates that the economy is operating above normal full capacity, which will put upward pressure on prices.
Potential GDP
The maximum production of final goods and services that is possible in the economy without putting upward pressure on the general level of prices.
Real GDP
The market value of all final goods and services actually produced, adjusted for changes in the price level, that is, in terms of constant prices of a base period.
What characterizes a negative GDP gap?
When potential GDP exceeds real GDP. A negative GDP gap indicates that the economy is operating at less than full capacity, which implies unemployment and under-utilized plant and equipment.
Will a positive GDP gap put upward or downward pressure on prices and why?
Upward. The economy is operating at greater than full capacity, which implies high employment and upward pressure on price levels. A positive GDP gap means real GDP exceeds potential GDP.
Which of the following indicates that the economy is in a recessionary phase?
A. The rate of unemployment decreases. B. The purchasing power of money declines. C. Potential national income exceeds actual national income. D. There is a shortage of essential raw materials and costs are rising.
C.
Potential national income exceeds actual national income.
National income is the total payments for economic resources included in the production of all goods and services.
During the recessionary phase of a business cycle, actual national income is typically less than potential national income as a result of decreased demand, which is characteristic of the recessionary phase of a business cycle and the resulting decrease in payments for goods and services.
Gross domestic product (GDP) is a measure of
A. the market value of all goods and services exchanged in the U.S. economy during a year.
B. the market value of all final goods and services produced by U.S. entities worldwide during a year.
C. The market value of all final goods produced in the domestic economy during a year.
D. The market value of all final goods and services produced for exchange in the domestic economy during a year.
D. The market value of all final goods and services produced for exchange in the domestic economy during a year.
By definition, the gross domestic product (GDP) is a measure of the market value of all final goods and services produced within the U.S. during a one-year period. GDP includes only goods that are in their completed form and ready for the end use, whether or not the final product has been sold.
Nominal GDP is measured at current prices. Real GDP measures output (GDP) at constant prices, that is, adjusted for changes in the level of prices since a base year.
Finally, potential GDP is a measure of the market value of maximum production of final goods and service that is possible in the economy without putting upward pressure on the level of prices in the economy.
Adjustment from gross national product (GNP) to net national product (NNP) would require which one of the following?
A. Deducting depreciation from the GNP. B. Deducting investment from the GNP. C. Adding depreciation to GNP. D. Adding investment to GNP.
A.
Deducting depreciation from the GNP.
Net National Product, like Gross National Product, measures the total output of all goods and services produced worldwide using the economic resources of U.S. entities, but does not include an amount (output value) for depreciation. Thus, depreciation would be deducted from GNP to derive NNP.
Which of the following graphs shows the maximum combination of goods and services that can be produced at a given time, if all available resources are used efficiently?
A. Aggregate demand curve. B. Aggregate supply curve. C. Productive-possibility curve. D. Indifference curve.
C.
Productive-possibility curve.
A productive-possibility curve measures the maximum amount of various goods and services an economy can produce at a given time with available technology and efficient use of all available resources.
A good produced in Year 1 that was in the finished goods inventory on December 31, Year 1, and was sold in January Year 2 would be included in whole or in part in the GDP of which year(s)?
Year 1 Yes/No
Year 2 Yes/No
Year 1 Yes
Year 2 No
A product that is in the finished goods inventory at the end of one year (Year 1) should be included in total in the GDP for that year. Since the product does not require further processing before being sold, it should be included in GDP of the year in which it was “finished,” regardless of when it is sold.
By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30, an estimated dividend at the end of the first year of $3 per share, and an expected growth rate of 10%
k = D / P + E
k = 3/30 + .10
k = 20%
