Chapter 8 Flashcards
Describe the circular flow of income ignoring taxes.
- In every economic exchange the seller receives exactly the same amount as the buyer spends.
- Goods and services flow in One Direction, and money payments flow in the other.
True or False
profit is a cost of production.
True
Explain why profit is considered a cost of production.
Profits are a part of a cost of production because entrepreneurs must be rewarded for providing their services or they won’t provide them in the first place.
Define total income.
The yearly amount earned by the nation’s resources (factors of production)
Extra notes: total income, therefore, includes wages, rent, interest payments, and profits that are received by workers, landowners, capital owners, and entrepreneurs respectively.
True or false:
another way of defining total income is the annual cost of producing the entire output of final goods and services.
True
Define final goods and services.
Goods and services that are at their final stage of production and will not be transformed into yet another good or service.
What are product markets?
Product markets are where households are the buyers and businesses are the sellers of consumer goods.
Extra Notes: consumer goods and services flow to household demanders while money flows in the opposite direction to business suppliers.
What are factor markets?
In factor markets, households are the sellers and businesses are the buyers. They sell resources such as labor, land, capital, and entrepreneurial ability.
Define profit.
Profit is defined as what is leftover from total business receipts after all costs, wages, rents, interest have been paid.
Profit is always the _____ item that makes total income equal to the dollar value of total output.
residual
Define gross domestic product.
The total market value of all final goods and services produced during a year by factors of production located within a nation’s borders.
True or False
all measures of domestic product and income are specified as rates measured in dollars per year.
True
What are intermediate goods?
Goods used up entirely in the production of final goods.
Define “value-added” from an economic standpoint.
The dollar value of an industry’s sales minus the value of intermediate goods used in production.
Define gross output.
The total market value of all goods and services produced during a year by factors of production within a nation’s borders.
This includes all forms of business-to-business expenditures and thereby double-counting business spending across all stages of production.
What are the three main transactions that do not appear in the calculation of GDP?
- Financial transactions
- Transfer payments
- Secondhand goods
What are the three general categories of purely financial transactions?
- Buying and selling of securities (stocks)
- Government transfer payments
- Private transfer payments (gifts of cash)
What are government transfer payments? Give an example.
Transfer payments or payments for which no productive services are concurrently provided in exchange.
The most obvious example is Social Security benefits and unemployment compensation.
True or False
GDP excludes non-market production.
True
True or False
GDP is a measure of the value of production in terms of market prices and an indicator of economic activity it is not a measure of a nation’s overall welfare.
True
What is the expenditure approach to calculating GDP?
The expenditure approach computes GDP by adding up the dollar value at current market prices of all final goods and services.
What is the income approach to calculating GDP?
The income approach measures GDP by adding up all components of national income, including wages, interest, rent, and profits.
What are the four elements that must be calculated when deriving GDP by the expenditure approach?
- Consumption
- Expenditures
- Investment
- Net Exports
What are the three categories of consumption expenditure?
- Durable consumer goods
- Nondurable consumer goods
- Service
What is the definition of a “durable consumer good?”
Consumer goods that have a lifespan of more than three years.
What is the definition of “nondurable consumer goods?”
Consumer goods that are used up within three years.
What is the definition of gross private domestic investment?
The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future.
Extra Notes: also included in this definition are changes in business inventories and repairs made to machines and buildings.
True or False
in estimating gross private domestic investment, government statisticians also add consumer expenditures on new residential structures because new housing represents an addition to our future productive capacity in the sense that a new house can generate housing services in the future.
True
True or False
In economics, investment refers only to additions to productive capacity, not transfers of assets.
True.
What is the definition of producer durables, or capital goods?
Durable goods, having an expected service life of more than three years that are used by businesses to produce other goods and services.
What is a fixed investment?
Purchases by businesses of newly produced producer durables, or capital goods, such as production machinery and office equipment.
What is the definition of inventory investment?
Changes in the stocks of finished goods and goods in process, as well as changes in the raw materials that businesses keep on hand.
Whenever inventories are decreasing, inventory investment is ______. When they are increasing, inventory investment is ______.
Negative
Positive
True or False
If a firm keeps the same amount of inventory throughout the year the inventory investment is negative.
False. If a firm keeps the same amount of inventory throughout the year inventory investment is zero.
True or False
all government goods and services are sold at a premium in the market. Therefore their market value is used when computing GDP.
False. Most government goods and services are not sold in the market at all. Therefore their values cannot be used when computing GDP.
How are net exports calculated?
Net exports equals total exports minus total imports.
X = Total exports - Total inports
Give the equation for the expenditure approach.
GDP = C + I + G + X
C = Consumer expenditures I = Investment expenditures G = Government expenditures X = net exports
From an economic standpoint, what is depreciation?
A decrease in the exchange value of 1 nation’s currency in terms of the currency of another nation. Also can be considered a reduction in the value of capital goods over a one year. Due to physical wear and tear.
True or False
Most capital or durable goods will depreciate over time.
True
What is the definition of net domestic product?
GDP minus depreciation.
Net GDP (NDP) = C + I + G + X - depreciation
Another name for depreciation is ______.
Capital consumption allowance.
What is “net investment?”
Investment corrected for depreciation.
I_NET = I - depreciation.
Factor payments are called ______.
Income
What is gross domestic income?
The sum of all income–wages, interest, rent, and profits – paid to the four factors of production.
True or False
Gross Domestic Product should be equal to Gross domestic income.
True
Using the income approach to calculate GDP, what are the four types of payments to individuals?
- Wages
- Interest
- Rent
- Profits
True or False
Rent includes the rental value of owner-occupied houses.
True
What is national income?
The total of all factor payments to resource owners.
What is personal income?
The amount of income that households actually receive before they pay personal income taxes.
What is disposable personal income?
When all personal income tax is subtracted from personal income.
What is a nominal value?
The value of something expressed in today’s dollars.
What is a real value?
The value of something adjusted for inflation.
What are constant dollars?
Dollar expressed in terms of real purchasing power.
The price corrected GDP is called the _____ GDP.
Real
What is the formula for real GDP?
Real GDP = (nominal GDP / price index)*(100)
What is a foreign exchange rate?
The price of one currency in terms of another.
