Chapter 5 (Measuring a Nations Income)

Question 1

when would you prefer to enter the labor force?

Answer 1

in a year of economic expansion

Question 2

The statistic might measure the ( All of the 6 statistics of macroeconomics).

Answer 2

total income of everyone in the economy (GDP), the rate at which average prices are rising or falling (inflation/deflation), the percentage of the labor force that is out of work (unemployment), total spending at stores (retail sales), or the imbalance of trade between Canada and the rest of the world (the trade deficit).

Question 3

economics is divided into

Answer 3

two branches:

microeconomics and macroeconomics

Question 4

Microeconomics is the study of

Answer 4

how individual households and firms make decisions and how they interact with one
another in markets

Question 5

Macroeconomics is the study of

Answer 5

the economy as a whole

Question 6

The goal of macroeconomics is to

Answer 6

explain the economic changes that affect many households, firms, and markets simultaneously.

Question 7

What is GDP?

Answer 7

gross domestic product, or simply GDP, which measures the total income of a nation.

Question 8

GDP is the most closely watched economic statistic because

Answer 8

it is thought to be the best single measure of a society’s economic well-being

Question 9

GDP measures two things at once:

Answer 9

the total income of everyone in the economy

and the total expenditure on the economy’s output of goods and services.

Question 10

The reason that GDP can perform the trick of measuring both total income and total
expenditure is that

Answer 10

these two things are really the same. For an economy as a whole, income must equal expenditure

Question 11

An economy’s income is the same as its expenditure because

Answer 11

every transaction has two parties: a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

Question 12

Suppose, for instance, that Karen pays Doug $100 to mow her lawn. In this case, Doug is a seller of a service, and Karen is a buyer. Doug earns $100, and Karen spends $100. Thus, the transaction contributes equally to the economy’s income and to its
expenditure

Answer 12

GDP, whether measured as total income or total expenditure, rises by $100.

Question 13

Circular flow diagram

Answer 13

Is the diagram showing income equals expenditure

Question 14

We can compute GDP for this economy in one of two ways:

Answer 14

by adding up the total expenditure by households or by adding up the total income (wages, rent, and profit) paid by firms. Because all expenditure in the economy ends up as someone’s income, GDP is the same regardless of how we compute it.

Question 15

Do households spend all their income?

Answer 15

No, they pay taxes and save for the future

Question 16

• Gross domestic product (GDP) is the

Answer 16

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

Question 17

GDP adds together many different kinds of products into a single measure of the value of economic activity.
To do this, it uses market prices.

Answer 17

Because market prices measure the amount people are willing to pay for different goods, they reflect the value of those goods. If the price of an apple is twice the price of an orange, then an apple contributes twice as much to GDP as does an orange.

Question 18

GDP tries to be comprehensive

Answer 18

It includes all items produced in the economy

and sold legally in markets. GDP excludes most items produced and sold illicitly.

Question 19

intermediate good

Answer 19

the paper made that’s used to make a card

Question 20

final good

Answer 20

the final product, card made from paper

Question 21

GDP includes only the value of blank goods.

Answer 21

final. It excludes double counting, the exception is when it’s added to inventory to sell in the future.

Question 22

GDP includes?

Answer 22

All good and services that are currently produced within a given country and within a given time period (usually 3 month interval).

Question 23

When the government reports the GDP for a quarter

Answer 23

it usually presents GDP “at an annual rate.” and making seasonal adjustment removing say holiday cycle

Question 24

Therefore GDP is the

Answer 24

total expenditure of the economy

Question 25

statistical discrepancy

Answer 25

is the difference in calculating total income in the economy vs. total expenditure, where they should be the same but data sources are not perfect

Question 26

To do this, GDP (which we denote as Y) is divided into four components:

Answer 26

consumption (C), investment (I), government purchases (G), and net exports (NX)

Question 27

This equation is an identity—an equation that must be true by the way the variables in the equation are defined

Answer 27

Y = C + I + G + N X

Question 28

because each dollar of expenditure included in GDP is placed into one of the four components of GDP

Answer 28

the total of the four components must be equal to GDP

Question 29

Consumption

Answer 29

is spending by households on goods and services.

Question 30

Investment

Answer 30

is the purchase of goods that will be used in the future to produce more goods and services. It is the sum of purchases of capital equipment, inventories, and structures.

Question 31

Government purchases

Answer 31

include spending on goods and services by local, territorial, provincial, and federal governments. It includes the salaries of government workers and spending on public works.

Question 32

Government payments on social assistance or pension plans?

Answer 32

Not part of GDP because GDP only measures production, things produced

Question 33

Net exports

Answer 33

equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports)

Question 34

net exports include goods and services produced abroad (with a minus sign) because

Answer 34

these goods and services are included in consumption, investment, and government purchases (with a plus sign) & it does not affect GDP.

Question 35

net exports turned out to be a negative

value, it reflects the difference between two very large amounts

Answer 35

International trade is therefore very important to the Canadian economy

Question 36

If total spending rises from one year to the next, one of

two things must be true:

Answer 36

(1) The economy is producing a larger output of goods

and services, or (2) goods and services are being sold at higher prices.

Question 37

economists use a measure called real GDP

Answer 37

In particular, they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services.

Question 38

nominal GDP

Answer 38

the production of goods and services valued at current prices: 100 hot dogs x $1.00 = 100 and 50 hamburgers x $2.00 = 100 so total expenditure is
$200. We do this for every year

Question 39

real GDP

Answer 39

the production of goods and services valued
at constant prices. first chose one year as a base year, we then use the price of the base year and multiply it by the quantity of the years. This gives us a measure of the amount produced that is not affected by changes in
prices, reflecting the economy’s ability to satisfy people’s needs and desires

Question 40

Which GDP is a better gauge of economic well-being

Answer 40

real GDP

Question 41

the GDP deflator

Answer 41

reflects the prices of goods and services but not the quantities produced

Question 42

GDP deflator calculation

Answer 42

GDP deflator = (Nominal GDP /Real GDP) x 100

Question 43

Because nominal GDP and real GDP must be the same in the base year, the GDP deflator for the base year always equals

Answer 43

100

Question 44

The GDP deflator measures

Answer 44

the current level of prices relative to the level of

prices in the base year.

Question 45

First, imagine that the quantities produced in the economy rise over time but prices remain the same.

Answer 45

In this case, both nominal and real GDP rise together, so the GDP deflator is constant

Question 46

Now suppose, instead, that prices rise over time but

the quantities produced stay the same.

Answer 46

In this second case, nominal GDP rises but

real GDP remains the same, so the GDP deflator rises as well

Question 47

Notice that, in both cases, the GDP deflator reflects

Answer 47

what’s happening to prices, not quantities.

Question 48

The inflation rate

Answer 48

is the percentage change in some measure of the price level from one period to the next

Question 49

inflation calculation is

Answer 49

inflation= [(nomial GDP/real GDp)-1] x 100, The deflator for current year/by base year-1 x100. 171/100-1 x 100 = 71%

Question 50

The most obvious feature of these data is

Answer 50

real GDP grows over time.

Question 51

the output of goods and services produced in Canada

has grown on average about

Answer 51

the output of goods and services produced in Canada

has grown on average about

Question 52

The second feature of the GDP data is that

Answer 52

growth is not steady. The upward climb of real GDP is occasionally interrupted by periods during which GDP
declines, called recessions

Question 53

(There is no ironclad rule for when we say that a recession has occurred, but a good rule of thumb

Answer 53

is two consecutive quarters of falling real GDP

Question 54

Much of macroeconomics is aimed at explaining the long-run growth and short-run fluctuations in real GDP

Answer 54

So we need different models for the two purposes

Question 55

The bars show the net amount of foreign direct investment in Canada. The fact that the bars have in recent years fallen below zero is an indication

Answer 55

that Canadians now own more of foreign firms than foreigners own of Canadian firms

Question 56

foreign direct investment (FDI) is a measure of how much of

Answer 56

Canadian industry is owned by non-Canadians.

Question 57

Canadian direct investment abroad (CDIA)

Answer 57

show how much Canadians own and control

of industry in the rest of the world.

Question 58

GDP measures both the economy’s total income and the economy’s total expenditure on goods and services. Thus, GDP per person tells us the income and expenditure of the average person in the economy

Answer 58

Because most people would prefer to receive higher income and enjoy higher expenditure, GDP per person seems a natural measure of the economic well-being of the average individual

Question 59

GDP is not, however, a perfect measure of well-being.

Answer 59

Some things that contribute to a good life are left out of GDP.

Question 60

GDP uses market prices to value goods and services, it excludes the value of almost all

Answer 60

activity that takes place outside of markets

Question 61

Another thing that GDP excludes is the quality

Answer 61

of the environment (pollution harms people)

Question 62

GDP also says nothing about the distribution of income. A society in which 100 people have annual incomes of $50 000 has GDP of $5 million and, not surprisingly, GDP per person of $50 000. So does a society in which 10 people earn $500 000 and 90 suffer with nothing at all. Few people would look at those two
situations and call them equivalent.

Answer 62

GDP per person tells us what happens to the
average person, but behind the average lies a large variety of personal experiences. The “In the News” feature that appears later in this chapter addresses the question of whether the distribution of income has become too skewed toward the rich. The suggestion is that a focus on GDP has caused society to fail to
appreciate the importance of how aggregate income is distributed across society.

Question 63

Researchers Lars Osberg and Andrew Sharpe of the Centre for the Study of Living Standards have taken account of the criticisms of GDP as a measure of well-being to produce what they consider to be a preferred
measure. Their index identifies the measure of GDP as just one of a long list of indicators of well-being.

Answer 63

Also included in their index are measures of poverty,
human capital, income inequality, natural resource consumption, and environmental degradation, in addition to other factors

Question 64

Tire table also shows life expectancy (the expected life span at birth) and a measure of “human development” developed by researchers at the United Nations. The Human Development Index (HDI) provides a summary measure of

Answer 64

the quality of life enjoyed by people living in each country. The HDI ranking depends on measures of years of education, inequality of income, gender equality, employment levels, measures of
poverty, and many more. The HDI emphasizes that there is more to human development than simply GDP; that a country with high GDP may nonetheless be “poor” if, for example, life expectancy is short and the distribution of income is very uneven

Question 65

Countries with low GDP per person tend to have more
infants with low birth weight, higher rates of infant mortality, higher rates of maternal mortality, higher rates of child malnutrition, and less common access
to safe drinking water. In countries with low GDP per person, fewer school-aged children are actually in school, and those who are in school must learn with fewer teachers per student. These countries also tend to have fewer televisions, fewer telephones, fewer paved roads, and fewer households with electricity.

Answer 65

In rich countries, such as Norway, the United
States, Canada, and Japan, people can expect to live into, or nearly into, their eighties, and citizens enjoy the benefits summarized by high values of the HDI.

Question 66

the correlation between real GDP per person and the HDI is very high at

Answer 66

73 percent

Question 67

Quantifying the behavior of the economy with statistics such as GDP is, therefore,

Answer 67

the first step to developing a science of macroeconomics