Chapter 6

Question 1

Final good

Answer 1

a good that is ready for its ultimate designated use.

• GDP uses ONLY final goods and services to avoid double/multiple counting.

Question 2

Gross Domestic Product (GDP)

Answer 2

the value of all final goods and services produced in a country during a time period (not accounting for inflation)

Question 3

Intermediate good

Answer 3

a good that is used in the production of another good.

Question 4

Double counting

Answer 4

adding the value of g&s twice mistakenly by counting intermediate goods into GDP

Question 5

Nondurable goods

Answer 5

tangible consumer items that are consumed/only used once (food)

Question 6

Semi-durable goods

Answer 6

items that can be used more than once and lasts ~1 year (cloth)

Question 7

Services

Answer 7

intangible items of value provided to consumers as opposed to physical goods (haircuts)

Question 8

Fixed investment

Answer 8

all new spending by producers on capital/producer goods that increases production capabilities (machinery, tools, factory)

Question 9

Inventory investment

Answer 9

purchases by businesses that add to the stocks of goods kept by the firm to meet consumer demand, an increase in inventory

Question 10

Investment (I)

Answer 10

The creation of capital goods to facilitate future production

Question 11

Government Purchases (G)

Answer 11

Government expenditures on goods and services.

• Includes employee salaries & payments to suppliers.
• Does not include transfer payments such as EI and Canada Pension Plan

Question 12

Income approach to calculating GDP

Answer 12

Calculates GDP by summing up the incomes received by owners of resources used in the production of goods and services.

• Add indirect taxes and subtract subsidies.
• Add depreciation (or capital consumption allowances).

Question 13

Factor payments

Answer 13

wages/salaries, rent, interest payments, and profits paid to the owners of productive resources.

Question 14

Personal income

Answer 14

the amount of income received by households (including transfer payments) before income taxes.

Question 15

Disposable income

Answer 15

Personal income available AFTER taxes.

Question 16

Price index

Answer 16

a measure of the trend in prices of goods and services over time.

Question 17

GDP deflator

Answer 17

a price index that measures the average level of all final goods and services produced in the economy.

• It is difficult to compare nominal GDP over time because of the changing value of money over time.

Question 18

Important factors excluded from GDP calculation

Answer 18

Non-market transactions, Underground economy, Leisure, Externalities, Quality of goods

• In less-developed countries GDP is more serious, because a significant amount of food and clothing is produced at home.

Question 19

Non-market transactions

Answer 19

the provision of goods and services outside of traditional markets for which no money is exchanged. (gifting & cooking for household)

Question 20

Underground economy

Answer 20

Unreported income from both legal & illegal sources.

• Illegal activities are hidden, therefore unreported.
• Legal activities that are unreported to avoid taxes.

Question 21

Externalities

Answer 21

side effects that accompany production and consumption but which are not included in the price.

• Production of some g&s has costs and benefits not included in price.
• The true value to society is not being reflected.