Chapter 5: Gross Domestic Product

Question 1

_______ _______ ________ is the market value of all final goods and services produced in a nation during a period of time

Answer 1

Gross domestic product (GDP)

Question 2

True or false: GDP only includes current transactions

Answer 2

True

Question 3

A used car or home that is being sold used are examples of what?

Answer 3

Secondhand transactions

Question 4

True or false: the sales commission on a used product produced in another GDP period doesn’t count in current GDP

Answer 4

False (current services are included in GDP, such as a salesperson selling a used car in current GDP period)

Question 5

What are transactions such as giving private gifts, buying and selling stocks and bonds, and making transfer payments called?

Answer 5

Nonproductive financial transactions

Question 6

True or false: transfer payments are included in the current GDP period

Answer 6

False

Question 7

A _____________ is a government payment to individuals not in exchange for goods or services currently produced (Welfare, social security, etc)

Answer 7

Transfer payment

Question 8

True or false: GDP counts only final goods

Answer 8

True

Question 9

Are intermediate goods (goods and services used as inputs for the production of final goods) included in GDP?

Answer 9

No

Question 10

_____________ are when firms demand the natural resources, labor, capital and entrepreneurship needed to produce the goods and services sold in the product markets

Answer 10

Factor markets

Question 11

_______________ are the income people receive for supplying the factors of production: land, labor, capital or entrepreneurship

Answer 11

Factor payments

Question 12

Are personal consumption expenditures the largest component of GDP?

Answer 12

Yes

Question 13

What is the difference between a flow and a stock?

Answer 13

1. A flow is rate of change in a quantity during a given time period (the number of gallons of water pouring into a bathtub per minute)
2. A stock is quantity measured at one point in time (the amount of water in a bathtub)

Question 14

One way to calculate GDP is to use the _____________ to measure total spending flowing through product markets in the circular flow diagram

Answer 14

expenditure approach

Question 15

True or false: Personal consumption expenditures comprise of total spending by households for durable goods, nondurable goods, and services

Answer 15

True

Question 16

Define what durable goods, nondurable goods, and services are

Answer 16

1. Durable goods are cars, appliances, and furniture
2. Nondurable goods are foods, clothing, soap, and gas
3. Services are legal advice, medical treatment, education, etc (this is the largest category in US economy)

Question 17

Is government spending included in GDP?

Answer 17

Yes (i.e., spending for police and state university professors, and capital in the form of tanks, schools, highways, bridges, and gov. buildings)

Question 18

True or false: net imports are included in U.S. GDP

Answer 18

False (net exports, goods foreigners purchase of U.S. products are)

Question 19

What is being shown? GDP = C + I + G + (X - M)

Answer 19

The total of household Consumption, Investment (spending by firms), Government spending, Net exports (exports minus imports)

Question 20

A second approach to measuring GDP is the __________ approach, which measures GDP by adding up all the incomes earned by households in exchange for the factors of production during a persiod of time

Question 21

How is GDP expressed with the second approach?

Answer 21

GDP = compensation of employees + rents + profits + net interest + indirect taxes (sales taxes, license fees, business property taxes, etc) + depreciation

Question 22

Does GDP exclude non-market transactions?

Answer 22

Yes

Question 23

____________ is calculated by adjusting GDP for depreciation

Answer 23

National Income (NI), a alternative to GDP

Question 24

Is Personal Income (PI) an alternative to GDP, in which the total income of households (not businesses) is measured

Answer 24

Yes

Question 25

What is the third alternative to GDP?

Answer 25

Disposable Personal Income (DI): amount of income that households actually have to spend or save after payment of personal taxes

Question 26

Are social security payments included in Personal Income?

Answer 26

Yes

Question 27

The most broadly based price index is the ____________

Answer 27

GDP chain price index

Question 28

Based on the circular flow model, money flows from households to businesses in ___________

Answer 28

Product markets

Question 29

The value of all final foods based on the prices existing during the time period of production (current dollar GDP, money GDP); what is being described?

Answer 29

Nominal GDP

Question 30

The value of all final goods produced in a given time period based on the prices existing in a selected base year (constant dollar GDP); what is being described?

Answer 30

Real GDP

Question 31

How is real GDP calculated?

Answer 31

Real GDP = (nominal GDP)/(GDP chain price index) x 100

Question 32

What happens if the underground economy is sizable?

Answer 32

GDP will understate the economy’s performance

Question 33

The income that people earn in resource or factor markets is called ____________

Answer 33

national income

Question 34

What are the 5 factors that GDP excludes?

Answer 34

1. Nonmarket transactions
2. Distribution, kind, and quality of products
3. Neglect of quality of life (leisure time)
4. The underground economy (such as illegal activities)
5. Economic bads (pollution that costs society but not factored into the GDP)

Question 35

What is fixed investment?

Answer 35

Investment by firms in fixed capital (such as new equipment or machinery used in the production of goods)

Question 36

True or false: Depreciation is also called capital consumption allowance

Answer 36

True

Question 37

True or false: National income (NI) is the total income earned by resource owners, including wages, rents, interest, and profits.

Answer 37

True