chapter 4

Question 1

why are transfer payments not included in the GDP

Answer 1

they are not received in exchange for production of a new good or service

Question 2

what is profit

Answer 2

income that remains after a firm has paid wages, interest and rent.

return to entrepreneurs for organising the other factors of production and for bearing the risk of producing and selling goods and services.

Question 3

Some of the income earned by households is not spent on goods and services or paid in taxes, but is

What does this make possible?

Answer 3

deposited in savings accounts in banks or is used to buy shares or bonds.
The flow of funds from households into the financial system makes it possible for the government and firms to borrow.

Question 4

what is included in investment?

Answer 4

1. business fixed investment
2. residential investment
3. changes in business inventory

Question 5

what is business fixed investment?

Answer 5

spending by firms on new factories, office buildings and machinery used to produce other goods

Question 6

residential investment

Answer 6

spending by households on new housing

Question 7

example of how changes in inventory can be included in GDP

Answer 7

If a car manufacturer has $20 million worth of unsold cars at the beginning of the year and $35 million worth of unsold cars at the end of the year, then the firm has spent $15 million on inventory investment during the year.

Question 8

When the ABS calculates GDP it does not include the

Answer 8

non-observed economy, which refers to economic activities that are missing from the data sources used to calculate GDP

Question 9

what two types of production does the non-observed economy include

Answer 9

production in the home

production in the ‘underground’ economy (sometimes referred to as the ‘cash economy’, ‘black economy’ or the ‘shadow economy’).

Question 10

what is household production

why is not included in the GDP

Answer 10

Household production refers to goods and services people produce for themselves.

Not bought and sold in markets

Question 11

In terms of the underground economy, why may the buying and selling of goods and services be concealed?

Answer 11

1. they are dealing in illegal goods and services
2. they want to avoid paying taxes
3. they want to avoid government regulations.

Question 12

Is not counting household production or production in the underground economy a serious shortcoming of GDP

Answer 12

there is not likely to be much change in the amounts of these types of production from one year to the next.

Question 13

increasing GDP can lead countries to devote more

Answer 13

resources to pollution reduction.
Developing countries often have higher levels of pollution than high-income countries because the lower GDPs of the developing countries make them more reluctant to spend resources on pollution reduction

Question 14

Holding prices constant means that

Answer 14

the purchasing power of a dollar remains the same from one year to the next.

Question 15

Ordinarily, the purchasing power of the dollar…

Answer 15

falls every year as price increases reduce the amount of goods and services that a dollar can buy.

Question 16

One drawback to calculating real GDP using base year prices is that,

Answer 16

over time, prices change relative to each other.

further away the current year is from the base year, the worse the problem becomes.

Question 17

GDP deflator?

Answer 17

measure of price level

Nominal GDP/Real GDP x 100

Question 18

Final Goods include:

Answer 18

(i) Goods purchased by consumer households as they are meant for final consumption (like milk purchased by households).
(ii) Goods purchased by firms for capital formation or investment (like machinery purchased by a firm).

It must be noted that final goods are neither resold nor used for any further transformation in the process of production.