W05 Worksheet - GDP PDF

Preview

Summary

Worksheet...

Description

ECON 151 Prepare: Chapter 8 Name: Thomas Brooks Section: In order to get full credit, answer all questions in either bold font or red font. Read Chapter 8 in the Hubbard/O’Brien text. 1. Define gross domestic product (GDP). Why is market value used instead of quantities? Is the value of intermediate goods and services included in GDP? GDP, or gross domestic product, is a term that measures the monetary market value encompassing goods and services during a period of time. It measures total production. Market value is used of quantities because it gives meaning behind the statistics. Quantity is used in microeconomics to represent the number of certain products, while market value is used in macroeconomics to represent the combined products in dollar terms. GDP does not include intermediate goods and services. 2. Why does the value of total production in the economy equal the value of total income? Explain simply and use the example in the text of the New Balance running shoes. They are equal because the full amount that a consumer pays for a good or service is essentially allocated among people within the process of selling that product. All of the money spent will end up as income to others. For example, if I purchase New Balance shoes at Footlocker for $149, that money then goes to New Balance worker’s wages, Footlocker worker’s wages, the salesman’s pocket, and so on until that $149 is dispersed completely in income. 3. List and define the four components of GDP. -Consumption expenditures are made by households and divided into three main groups -Expenditures on services, such as medical care, education, and haircuts -Expenditures on nondurable goods, such as food and clothing -Expenditures on durable goods, such as automobiles and furniture -Investment (Spending on gross private domestic investment) – divided into three main groups -Business fixed investment is spending by firms on new factories, office buildings, and machinery used to produce other goods. Since 2013, this category of investment has included business spending on research and development. The BEA had previously considered such spending to be an intermediate good. -Residential investment is spending by households and firms on new single-family and multi-unit houses. -Changes in business inventories are changes in the stocks of goods that have been produced but not yet sold. If Ford has $200 million worth of unsold cars at the beginning of the year and $350 million worth of unsold cars at the end of the year, then the firm has spent $150 million on inventory investment during the year. -Government purchases are spending by federal, state, and local governments on goods and services, such as teachers’ salaries, highways, and aircraft carriers.

-Net exports are equal to exports minus imports. Exports are goods and services produced in the United States and purchased by foreign firms, households, and governments

4. What are the two types of production not included in GDP? Give two examples of each type of production. Production in the home A carpenter makes a bookshelf for himself instead of selling it. A homemaker’s service for a homemaker’s family Production in the underground economy - People conceal what they buy and sell Illegal goods and services Getting paid under the table to avoid taxes

5. What are the reasons why GDP is not a perfect measure of well-being? The GDP is not adjusted to fit every situation and is therefore slightly skewed based on certain uncontrollable aspects 6.

Distinguish between real GDP & nominal GDP. Which would be a better measure of the output of an economy over time? Why? Real GDP - Calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years Nominal GDP - Calculated by summing the current values of final goods and services Real GDP would be a better measure of the output of an economy over time because it takes into consideration the base year and the GDP in later years 7. What do economists mean by the price level? It measures the average prices of goods and services in the economy. Economists want a stable price level 8. What does the GDP deflator have to do with the price level? It allows economists to track an increase in price levels overtime 9. Briefly describe the 4 alternative ways to measure total production and total income: National income – depreciation subtracted from the GDP Disposable personal income – personal income minus personal tax payments The division of income -...