chapter 9 Flashcards
In the question, “How much value is created in a year?” the words “value is created” could be replaced by which phrase?
how much “income is earned” in a year.
True, false, explain: Wealth and income are the same thing
False. Income is a flow that reflects value creation. Wealth is a stock of what you own, which is accumulated savings from past income earned
True, false, explain: We actually measure income as the social gain from production.
False. Though the true measure of income is social gain, we measure how much is paid for output that is produced.
define GDP
GDP is the market value value of all final goods and services produced within a country’s borders in one year. Tells us how big an economy is.
GDP does NOT include..
intermediate goods
What is a final good?
A good that is sold to a final customer. Is counted in GDP.
wealth
Wealth is a stock. includes all of your bank account and assets. Like a lake.
Income
income is a flow. How much your paycheck is. like a river.
What is one thing not counted in GDP?
a social security check.
True, false, explain: The value of crystal meth production is not included in US GDP.
True. Because we do not have reliable records of the production.
True, false, explain: Sales of used goods are not counted in GDP.
True. Because they have been previously counted, so to count them again would double count them.
True, false, explain: The value of a newly issued share of stock is counted in GDP.-
False. The money that comes from the stock sale will purchase capital, and to count both transactions would double count.
Transfer payments
taking from one person and giving to another, but not in return for any goods or services, such as SS unemployment insurance checks, and food stamps. NOT counted in GDP
What are two approaches to calculating GDP?-
?- The expenditure approach and the income approach.
Which approach does government use in calculating GDP. Why?
The income approach–because tax records give information about income.
Expenditure approach
Used by media and most referenced gov’t reports. Add up the current market values of all final goods and services.
Income approach
how Gov’t statistics are actually calculated. adds up all the payments to factors of production generated by production.
Which is bigger, the dollar value of output produced in the economy or the dollar value of income earned in the economy? Why?
They are equal, because every penny gained from the sale of a final good is income for someone in the production process
What are the four components of the expenditure approach?
Consumption, investment, government purchases, net exports.
Of the four components of GDP as measured by the expenditure approach, which is largest, second largest, and third largest?
In order: Consumption, Government purchases, Investment, Net Exports
What is the definition of Investment as regards the expenditure approach to GDP?-
Production of capital goods, production of new residential housing, changes in inventories
True, false, explain: We measure Real GDP in order to reflect the fact that though illegal goods may destructive, they have value to those who buy them.
False. We measure Real GDP to adjust for inflation.
Consumption
spending by consumers on nondurable goods, durable goods, and services.
Investment
spending by businesses on capital (PPE), changes in business inventories, and spending on new residential housing. Does not mention stocks or bonds.
Gov’t purchases
spending by all levels of government on goods and services. Transfer payments do not fit this definition.
net exports
exports-imports.
Real GDP
It is what GDP would be if prices were the same as they had been in the base year
Since we have Real GDP, why would we ever want to use nominal GDP?-
As long as we are not comparing values of different numbers across time, where inflation could occur, there is nothing to gain from using nominal GDP.
The reason we use Real GDP is to
remove the effects of inflation from the GDP measure
What is the definition of economic growth?
the percentage change in Real GDP over a year’s time
A very strong growth rate for the economy is
over 3.5%
True, false, explain: We would be pleased to find out we are at a peak of economic activity.
False. That means we are about to contract.
What is the definition of a recession?-
Two successive quarterly declines in Real GDP.
Compare the 1982 recession and recovery to the latest recession and recovery
The 1982 recession was as bad or worse than the latest recessions, but the recovery in 1982 was much stronger.
What is the definition of per capita GDP? If we know this number, what does it tell us about the economy (other than the definition)?
GDP/population. It tells us how well off the people in the economy are.
business cycle
describes the ups and downs of the economy
Since the recession began in 2008, economic growth has been about
2%
Over the past 6 decades, the US has spent approximately
10% of the time in recession
True, false, explain: When we look a graph of five decades of GDP per capita we see that the average person is now worse off than before
False. Wellbeing generally improves over time.
True, false, explain: The US is not the highest ranked country in terms of economic freedom, but its economic freedom index is rising.
False. The US is not the highest ranked country, and its ranking has fallen for the past five years.
True, false, explain: If China had a higher economic growth rate than the US, that would mean that it would be a better place to live than the U. S.
False. Growth rates tell one the direction of the economy. GDP per capita is the best measure of living standards.
True, false, explain: Since China is growing better than the US, they currently have better economic policies than the US.-
.- False. Growth also depends on the direction of policy. If China’s policies are worse than the US, but are improving, they might have higher growth than the US.
China’s recent growth is likely the result of having found
the best policy directions
