Chapter 9 Notes

Question 1

In the question, “How much value is created in a year?” the words “value is created” could be replaced by which phrase?

Answer 1

How much “income is earned” in a year

Question 2

True, false, explain: Wealth and income are the same thing

Answer 2

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.

Question 3

True, false, explain: We actually measure income as the social gain from production

Answer 3

False. Though the true measure of income is social gain, we measure how much is paid for output that is produced.

Question 4

Define GDP

Answer 4

GDP is the market value of all final goods and services produced within a country’s borders in one year.

Question 5

What is a final good?

Answer 5

One that is sold to a final consumer

Question 6

True, false, explain: The value of crystal meth production is not included in US GDP

Answer 6

True. Because we do not have reliable records of the production.

Question 7

True, false, explain: Sales of used goods are not counted in GDP.

Answer 7

True. Because they have been previously counted, so to count them again would double count them.

Question 8

True, false, explain: The value of a newly issued share of stock is counted in GDP

Answer 8

False. The money that comes from the stock sale will purchase capital, and to count both transactions would double count.

Question 9

What are two approaches to calculating GDP?

Answer 9

The expenditure approach and the income approach.

Question 10

Which approach does government use in calculating GDP. Why?

Answer 10

The income approach–because tax records give information about income.

Question 11

Which is bigger, the dollar value of output produced in the economy or the dollar value of income earned in the economy? Why?

Answer 11

They are equal, because every penny gained from the sale of a final good is income for someone in the production process.

Question 12

What are the four components of the expenditure approach?

Answer 12

Consumption, investment, government purchases, net exports.

Question 13

Of the four components of GDP as measured by the expenditure approach, which is largest, second largest, and third largest?

Answer 13

In order: Consumption, Government purchases, Investment, Net Exports

Question 14

What is the definition of Investment as regards the expenditure approach to GDP?

Answer 14

Production of capital goods, production of new residential housing, changes in inventories

Question 15

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.

Answer 15

False. We measure Real GDP to adjust for inflation.

Question 16

What is Real GDP?

Answer 16

It is what GDP would be if prices were the same as they had been in the base year.

Question 17

Since we have Real GDP, why would we ever want to use nominal GDP?

Answer 17

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.

Question 18

What is the definition of economic growth?

Answer 18

The percentage change in Real GDP over a year’s time.

Question 19

An examination of a graph of Real GDP over six decades reveals something about our economy. What does it reveal?

Answer 19

Our economy generally grows.

Question 20

A very strong growth rate for the economy is

Answer 20

Over 3.5%

Question 21

True, false, explain: We would be pleased to find out we are at a peak of economic activity

Answer 21

False. That means we are about to contract.

Question 22

What is the definition of a recession?

Answer 22

Two successive quarterly declines in Real GDP.

Question 23

Compare the 1982 recession and recovery to the latest recession and recovery.

Answer 23

The 1982 recession was as bad or worse than the latest recessions, but the recovery in 1982 was much stronger.

Question 24

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)?

Answer 24

GDP/population. It tells us how well off the people in the economy are.

Question 25

What does GDP tell us about an economy?

Answer 25

How big it is

Question 26

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.

Answer 26

False. Wellbeing generally improves over time.

Question 27

Which is bigger, US GDP Per capita or Canadian GDP Per capita? By how much?

Answer 27

US GDP Per Capita is bigger by about 20%

Question 28

True, false, explain: The US is not the highest ranked country in terms of economic freedom, but its economic freedom index is rising.

Answer 28

False. The US is not the highest ranked country, and its ranking has fallen for the past five years.

Question 29

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.

Answer 29

False. Growth rates tell one the direction of the economy. GDP per capita is the best measure of living standards.

Question 30

True, false, explain: Since China is growing better than the US, they currently have better economic policies than the US.

Answer 30

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.

Question 31

What is the most recent quarterly US economic growth?

Answer 31

1/10 of 1%

Question 32

What was US GDP in the most recent quarter?

Answer 32

$15.9 Trillion