Chapter 5

Question 1

What are the two markets separating households from firms?

Answer 1

• Product market: contains goods and services supplied by firms and demanded by households.
• Factor market: contains the labor and stuff supplied by households and demanded by firms.

Question 2

Define GDP.

Answer 2

• Total market value of final goods and services produced in the economy in a given year.

Question 3

What’s the difference between final and intermediate goods?

Answer 3

• Final goods: bought for consumption, not those sold between firms.
• Intermediate goods: goods exchanged between firms for the sake of production such as machinery or raw materials.

Question 4

Total market value.

Answer 4

• How GDP is calculated.

* the sum of quantity of n times price of n for product n for all final products of the economy.

Question 5

Real GDP vs. nominal GDP.

Answer 5

• Real GDP: measure of GDP controlled for changes in prices.

* Nominal GDP: value of GDP in current $.

Question 6

Define economic growth.

Answer 6

• Sustained increase in real GDP over a long period of time.

Question 7

GDP deflator.

Answer 7

• Equal to (nominal GDP / real GDP) x 100. Finds the amount to adjust the GDP for [inflation].

Question 8

Chain-weighted index.

Answer 8

• Determines changes in prices by using an average of base years from neighboring years.

Question 9

Define the 4 components of GDP.

Answer 9

• Consumption: purchases by consumers.
• Private investment: purchases by firms.
• Gov’t purchases: purchases by fed, state, or local gov’t.
• Net exports: domestic exports - domestic imports.

Question 10

What are the 3 components of consumption expenditures?

Answer 10

• Durable goods: lasts 6+ months.
• Nondurable goods: does not last more than 6+ months.
• Services: consumer purchases where nothing is produced.

Question 11

What are the 3 components of private investment expenditures?

Answer 11

• New plants / equipment purchased during the year.
• Newly produced housing.
• Additions to the stock of inventories of firms in the year.

Question 12

What is gross investment?

Answer 12

• Total new investment + expenditures.

Question 13

Depreciation.

Answer 13

• Reduction in the value of capital goods as a result of wear.

Question 14

Net investment.

Answer 14

• Gross investment - depreciation.

Question 15

What are transfer payments?

Answer 15

• Payments by gov’t to individuals that do not include production of goods and services, such as welfare.
• This is not included in GDP.

Question 16

What is a trade deficit? A trade surplus?

Answer 16

• Trade deficit: when net exports < 0.

* Trade surplus: when net exports > 0.

Question 17

What is the GDP equation?

Answer 17

• Y = C + I + G + NX

Question 18

What is national income?

Answer 18

• Total income earned by nation’s residents here and abroad in production of goods.

Question 19

What is GNP?

Answer 19

• GDP + net income earned abroad.

Question 20

What are the 6 components of national income?

Answer 20

• Compensation of employees.
• Corporate profits.
• Rental income.
• Proprietors income (basically small businesses).
• Net interests (stocks and banks).
• Other items.

Question 21

What is personal income?

Answer 21

• Income, including transfer payments, received by households.

Question 22

What is personal disposable income?

Answer 22

• Income left after income taxes.

Question 23

Define value added.

Answer 23

• Sum of all incomes; included wages, interests, profits, and rents generated by organizations.

Question 24

What is a recession? A depression?

Answer 24

• Recession: 6 months of more of losses.

* Depression: when 10% of GDP is lost; more serious that a recession.

Question 25

What are the shortcomings of GDP?

Answer 25

• Housework and childcare are not taken into account.
• How much leisure ppl have is not taken into account.
• The underground economy is not taken into account; like eBay or lemonade stands.
• The effects of pollution are not taken into account.

Question 26

How are the following calculated: per capita GDP, growth rate, and inflation?

Answer 26

• Per capita GDP = GDP / population.
• Growth rate = 100 x (GDP yr2 - GDP yr1) / GDP yr1.
• Inflation = nominal GDP growth rate - real GDP growth rate.