macro ch24 & 25

Question 1

what does GDP measure?

Answer 1

total production/income/consumption of everyone in the economy.

Question 2

what are the 3 basic methods used to measure GDP

Answer 2

the output method – we add up the value of all the goods and
services produced in the economy.
o the income method – we add up what is earned by people
and firms in the economy → wages, rents, profits, etc.
o the spending method – we add up what all the components of
the economy (people, firms, gov’t) spend on goods + services.

Question 3

For the economy as a whole does income equals expenditure? Why or why not?

Answer 3

it DOES because every dollar a buyer spends is a dollar of income for the seller.

Question 4

what are some factors of production?

Answer 4

inputs like labor, land, capital, and
natural resources.

Question 5

what are factor payments

Answer 5

payments for the factors of production (e.g., wages, rent, interest).

Question 6

what is GDP?
what is excluded from it?

Answer 6

the (1) market value of (2) all final goods & services produced
(3) within a country (4) in a given period of time.

-goods and services you produced for YOURSELF have NO market value
-intermediate goods to avoid miscalculation

Question 7

what is the difference between final goods and intermediate goods?

Answer 7

final goods: a good that is ultimately consumed, rather than used in the production of another good.
intermediate goods: used as components or ingredients in the
production of other goods.

Question 8

what is the difference between tangible and intangible goods

Answer 8

tangible goods → stuff you can touch, like iPads, kayaks, beer
* intangible goods → stuff you can’t touch, like haircuts, dry cleaning, Buckethead concert tickets, cell phone service.

both apart of GDP

Question 9

what is GNP

Answer 9

(gross national product) – measures activity by US
persons, no matter where they take place.

Question 10

how often is GDP measured?

Answer 10

quarterly ( every 3 months)

Question 11

what are the components of GDP

Answer 11

Y (income) = (C)onsumption + (I)nvestment + (G)overnment expenditures + NX

C= spending by people
I= spending by firms (not purchasing stocks and bonds)
G=spending by the government (excludes transfer payments, such as Social Security or
unemployment insurance benefits)
NX= exports-imports (typically always negative)

Question 12

what is the special rule for housing

Answer 12

for homeowners, consumption includes the imputed rental value of the house [what you could rent it for], but not the purchase price or mortgage payments.

Question 13

how does inventory work and what is it

Answer 13

it is components of
final goods; final goods that
are complete and ready to be sold but not sold yet

if production > sales, inventories increase
if production < sales, inventories decrease

Question 14

what is mercantilism

Answer 14

the belief that countries are more
prosperous when they export more than they import.

Question 15

what type of GDP is corrected for inflation

Answer 15

Real GDP

Question 16

how do you calculate percentage changes

Answer 16

new-old/old

Question 17

what do the changes in real and nominal GDP reflect

Answer 17

Real: only changes in the amounts being produced.

Nominal: changes in both prices and
quantities.

Question 18

what are the 3 ways to measure inflation

Answer 18

1. GDP deflator (100*Nominal GDP/Real GDP)
2. CPI (consumer price index)
3. PCE (Personal consumption expenditures price index) - feds prefer this

Question 19

what does CPI measure

Answer 19

measures change in the typical costs faced by the typical consumer (that is, it only assesses some costs of some people)

Question 20

How do we calculate CPI and
then the inflation rate?

Answer 20

1. Find the “basket” – the collection of things a typical
   consumer buys regularly.
2. Find the prices of the goods and services in the basket.
3. Compute the total cost of the goods and services in the
   basket.
4. Choose a base year and compute the index. (100 x
   cost of basket in current year/
   cost of basket in base year)
5. Compute the inflation rate. (100 x new CPI - old CPI/ old CPI)

Question 21

What’s in the CPI “basket”

Answer 21

all goods and
services that people TYPICALLY
purchase for consumption. they don’t care about stuff that
people don’t buy regularly

Question 22

what is substitution bias

Answer 22

when some prices rise faster than others and consumers substitute toward goods that become relatively cheaper

PCE fixes this

Question 23

what is unmeasured quality change

Answer 23

when firms are constantly improving the quality of their products, making it hard to make meaningful price comparisons over time.

Question 24

what is introduction of new goods

Answer 24

it increases variety and allows
consumers to find products that more closely meet their needs.

the same number of dollars buys more happiness= utility increases

in effect, a dollar becomes more valuable → each dollar spent delivers more utility.

Question 25

which 3 problems causes CPI to overstate the increases in the cost of living

Answer 25

substitution bias
introduction of new goods
& unmeasured quality change

Question 26

How is the CPI different from the GDP deflator?

Answer 26

Imported consumer goods:
included in CPI
excluded from GDP deflator
The basket:
CPI uses fixed basket
GDP deflator uses basket of
currently produced goods & services
This matters if different prices are changing by different amounts.
Capital goods:
excluded from CPI
included in GDP deflator (if produced domestically)

Question 27

how do you compare dollar figures from different times

Answer 27

Amount in today’s dollars=
Amount in year T dollars *
Price level (CPI) today/Price level (CPI) in year T

Question 28

what is indexing

Answer 28

it is correcting variables for inflation
A dollar amount is indexed for inflation if it is automatically
corrected for inflation by law or in a contract.