Chapter 7

Question 1

The difference between FLOW & STOCK values

Answer 1

Flow values = values based on (tied to) a given time period.
ex. income; spending; production

Stock values = accumulated values
ex. bank account; credit score; GPA; population; oil deposits, etc.

Question 2

GPD is all about the question:

Answer 2

Was something produced here and now?

Question 3

How GDP is computed using the production method adding-up the market value of final
goods

Answer 3

Quantities of all goods/services produced * price= sum of all the “value-added”
The sum of all the “value-added” from both final & intermediary goods.

Question 4

How to use Value Added to compute GDP, and the relationship between value added and
market value of final goods

Answer 4

How to use Value-Added:
Value of Output (Revenue made) - Value of Intermediary Input (materials, supplies, etc.) = Value-Added
ex:
Farmer’s value-added: $100 (revenue) - $0 (no intermediate inputs) = $100
Miller’s value-added: $200 (revenue) - $100 (cost of wheat) = $100
Baker’s value-added: $500 (revenue) - $200 (cost of flour) = $300
Total GDP: $100 + $100 + $300 = $500

Relationship:
The sum of the value-added of all economic units involved in producing a final good = the market value of that final good.
Helps not to double-count

Question 5

GPD Expenditures Measuring

Answer 5

Spending = Consumption + Gov. Purchases + Investments + Net Exports
GDP =C+I +G+NX

Question 6

Category of spending: Consumption (C)

Answer 6

Household spending= 2/3 of US GDP
1. Non-Durable Goods: Food & Clothes
2. Durable Goods: Cellphones, Cars, Appliances, Furniture, NOT HOUSES
3. Services: entertainment, healthcare, education, insurance, etc.
(EXCLUDES HOUSES)

Question 7

Category of spending: Government Purchases (G)

Answer 7

It only includes spending on goods & services for the gov.
ex. defense, infrastructure, education
EXCLUDES: Transfer payments: social security, Medicaid, medicare, welfare, interest on our national debt

Question 8

Category of spending: Investments (I)

Answer 8

Business/Firm spending
* NOT STOCKS & BONDS*
1. Non-residential business fixed investment: firms buying more capital (things that make other things)
2. Residential Investment: any NEW house or apt. building
3. Inventory Investment: when goods have been produced but not yet sold; we add their value to inventory investment, when sold, we subtract them from inventory

Question 9

Category of spending: Net Exports (Nx)

Answer 9

Exports-Imports
Nx>0 : Exports>Imports : Trade surplus
Nx<0 : Exports<Imports: Trade deficit

Question 10

How to reconcile differences in Production method GDP (what was produced) and Expenditure
method GDP (what was bought) using inventory investment to make Expenditure = Production

Answer 10

GDP:
Production= Spending
“made” ≠ “bought/sold”
made=bought/sold OR in inventory
When goods have been produced but not yet sold; we add their value to inventory investment, when sold, we subtract them from inventory

Question 11

Things to Note

Answer 11

1. I is a negative entry when C, I, or G includes spending on goods from previous years.
2. Nx is a negative account entry when C, I, or G includes spending on imports.
3. Gross National Income measures how the income generated by producing and selling our
   GDP is distributed, and that employee compensation represent the largest portion of Income.

Question 12

Flow chart

Answer 12

Firms: goods & services –> households, the gov., the world (net exports back & forth), and back to firms (capital investment), income to households

Households: Consumption –> firms
The Government: Gov. Purchases–> firms
The world: net exports–> firms

Question 13

Difference between real & nominal values

Answer 13

Nominal Values:
1. are not adjusted for inflation
2. are measured using the current dollar value
3. can change due to BOTH changes in quantity & prices

Real Values:
1. are adjusted for inflation
2. can only change due to quantity change

In the base yr. nominal & real values are always the same

Question 14

Why does it only make sense to compare real values over time?

Answer 14

It shows you economic changes over time that are accurate

Question 15

Compute both Real and Nominal GDP in a “small nation” setting

Answer 15

Year Quantity/Coconuts Price/Coconuts Quantity/Fish
Price/Fish
2023 (Base Year) 100 $1 50 $2
2024 120 $1.20 60 $2.50

Nominal GDP:
2023: (100x1) + (50x2)= 200
2024: (120x1.20) + (60x2.50)= 300

Real GDP:
2023: (100x1)+(50x2)= 200 same as base yr.
2024: (120x1)+(60x2)= 240

Question 16

Three ways of measuring GDP

Answer 16

1. Production = goods & services
2. Expenditures = spending = Consumption + Gov. Purchases+ Investments + Nx
3. Income:
   2/3 of all income = “wages” for workers
   1/3 ownership = “profit”, lending = “interest”, land = “rent”