MacroEconomics : Test 1 Material

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macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

macroeconomics

growth of the economy and fluctuations in output, employment, and the general level of prices.

growth of output

makes higher levels of consumption and living standards possible

growth of output

the key to a higher living standard

fluctuations

can retard growth and generate economic hardship

Simon Kuznets

developed basic consecpts of national income accounting during the 1920 and 1930

Simon Kuznets

provided the methodology for modern national income accounting

Simon Kuznets

developed the first reliable national - income measures for the united states

GDP

the market value of final goods and services produced within a country during a specific time period

GDP

most widely used measure of economic performance

GDP

a "flow" concept

GDP

a measure of output

GDP

only final goods and services count towards the ______

GDP

only transactions involving production count towards the _______

GDP

only production within the country is counted towards the _____

GDP

a measure of domestic product during the current period

GDP

a measure of the value of the goods and services that were purchased by households, investors, governments, and foreigners

GDP

a measure of aggregated income

GDP

a measure of the market value of the output produced

GDP

a measure of the income generated by those who produced the output

GDP

counts only goods and services produced within the geographic borders of the country

GDP

a measure of both output and income

Expenditure approach

GDP can be reached by totaling the expenditures on goods and services produced during the year

Expenditure approach

has four components for calculating the GDP

Expenditure approach

personal consumption Expenditures, gross private domestic investment, government consumption, and gross investment are used to calculate this approach to calculating the GDP

consumption purchases

the largest component of GDP under the Expenditure approach

consumption purchases

household spending on consumer goods and services during the current period under the Expenditure approach

gross private investment

the production or construction of capital goods that provide a flow of future service

gross private investment

the flow of private sector expenditures on durable assets (fixed investments) plus the addition to inventories (inventory investment) during a period

gross private investment

expenditures enhance our ability to provide consumer benefits in the future

net investment

gross investment minus an allowance for depreciation and obsolescence of machinery and other physical assets during the year

depreciation

the estimated amount of physical capital (ex. machines, buildings) that is worn out or used up producing goods during a period

True

True/False - a substantial amount of net investment indicates that the capital stock of the economy is growing, thereby enhancing the economy's future productive potential

true

True/False - a low rate of net investment or a negative net investment implies a stagnagting or contracting economy

True

True/False - countries with a large net investment rate will tend to grow more rapidly than those with a low or negative rate of net investment

Resource cost income approach

uses aggregate income (compensation of employees, wages, salaries, income of self-employedproprietors, rents,profits, interest) non income cost items (indirect business taxes, depreciation) and Net income of foreigners to calculate GDP

Resource cost income approach

GDP can be calculated by summing the income payments to the resource suppliers of the things used to produce those goods and services

True

True/False - the dollar flo of expenditures on final goods = the dollar flow of income (and indirect cost) from final goods

GDP

only goods produced during the current pereiod are counted towards the _____

GDP

if a financial transaction involves a sales commission the commission is included in the _____ because it incolves a services rendered during the current period

intermediate goods

goods in intermediate stages not counted towards the GDP

final and market goods and services

those purchased for final use rather than of resale or futher proccessing

False

True/False - the purchases and sales of stocks, bonds, and US Securities are included in the GDP

True

True/False - Governement income transfer payments (social security, welfare, veterans payment) are also omitted from the GDP financial transactions/income transfers - move ownership from one party to another

goods and services produced

increases output by the amount the purchaser pays for the ________ . the total spending on all ______________ during the year is then summed to obttain the GDP

expansion in output

the source of higher income levels

expansion in output

the additional production of goods and services that people value

inventory investment

changes during the year in the market value of unsold goods on shelves and in warehouses

inventory investment

changes in the stock of unsold goods and raw materials held during a period

True

True/False - if business firms have more goods on hand at the end of the year than they had at the beginning of the year, inventory investment will be positive

GDP

inventory investment is added to the ______

GDP

includes the government consumption and gross investment

True

True/False - a decline in inventories would indicate that the purchases of goods and services exceeded current production

government consumption

includes expenditures on items like office supplies, law enforcement, and the operation of veteran hospitals which are consumed during the current period

government consumption

the purchase of long- lasting capital goods, like missiles, highways, and dams for flood control . as a result the government's total expenditures are substantially higher than its total consumption and investment expenditures

True

True/False - transfer payments are excluded from from GDP because they do not involve current production

True

True/False - government purchases are counted at their cost to taxpayers rather than their value to those receiving them

net exports

# of exports minus # of imports

exports

goods and services produced donestically but sold to foreigners

exports

domestically produced goods and services sold to foreigners

Imports

foreign produced goods and services purchases domestically

Imports

goods and service produced by foreign but purchased by domestic consumers, businesses, and governments

GDP

measure of domestic production -output produced within the borders of a nation

measuring GDP by the expenditure approach

add exports, subtract imports

net exports

total exports minus total imports = __________

positive net export

when we sell more to foreigners than we buy from them

negative net export

when we buy more from foreigners than we sell

GDP

developed to help us better access what is happening to output and income over time

True

True/False - expansion in the production of goods and services people value is the source of higher incomes and living standards

increase in nominal value of GDP

an expansion in the quanity of goods produced an _________

increase in nominal value of GDP

higher prices leads to an _______

nominal values

when tracking the path of GDP and other income measure across time periods economists use price indexes to adjust ____ for the effects of inflation

nominal values

also known as money values

nominal values

values expressed in current dollars

inflation

in increase in the general level of prices over time

real values

values that have been adjusted for the effects of inflation

Consumer price index

designed to measure the impact of price changes on the cost of the typical bundle of goods puchased by households

Consumer price index

an indicator of the general level of prices .

Consumer price index

attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period

GDP deflator

a price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year

GDP deflator

measures the prices of capital goods and other goods and services purchased by businesses and governments

GDP deflator

designed to measure the change in the average price of the market basket of goods included in GDP

inflation

an increase in the general level of prices of goods and services

inflation

the purchasing power of the monetary unit such as the dollar declines when inflation is present

Real GDP

AKA CHAINED DOLLARS

Real GDP

the real stuff . The value of final goods and services produced in a given year when valued at the prices in a reference/previous year .

Nomial GDP

The value of final goods and services produced in a given year. the prices are valued at the prices in that same year

Nomial GDP

gross domestic product calculated at current price levels

Real GDP

the production of goods and services valued at constant prices

GDP

value of total production = Aggregate Income = Aggregate Expenditure

Aggravated Expenditure

the dollar amount of what buyers pay for it

Aggregate Income

what it cost to make things (profits and wages, expenses )

GDP

can be measured by calculating either aggregated expenditure or income (focused on aggregate expenditure)

consumption expenditure

abbreviated C

investment expenditure

abbreviated I

government expenditure

abbreviated G

Net Exports

abbreviated X, M or NX

Nominal GDP

can rise from one year to the next either
a) production rises or
b) prices rise ( inflations)
adjust for inflation = control for inflation

real GDP

is adjusted for changes in prices over time

real GDP

can only rise from one year to the next if production rises

real GDP

GDP adjusted for inflation

Nominall

example ::: top grossing movies in the box office and of all time ( # of tickets sold + amounts of tickets sold = top movies)

Real

movie popularitly not focused on amount of tickets

Business Cycle

the periodic irregular up and down movement in production and jobs

Business Cycle

the pattern of expansion and contraction in economic activity (economic fluctuations) around the growth trend in economic activity

Business Cycle

2 major phases . 2 turning points . (what goes up must come down)

Recession

a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment , and whole sale retail trade

Peak

the turning point where it isnt changing at all (neighter up nor down ) ( in reality there is no zero you must look for the point of transition from positive to negative . )

Contraction

where Real GDP is going down lasting only 6 months (after 6 months or 2 quarters it becomes a recession)

Trough

bottom of the contraction

Economic Growth

generally calculated as the percentage change in real GDP from one year to the next

GDP

the total $$ value of all items that is produced using these resources

Expansion

rising

problems with GDP

only Final goods and services are counted . no intermediate goods are counted to avoid double counting . only the final product is used . (example: nails in a table. the table is counted. the nails used are not counted until the end)

problems with GDP

no used goods are counted . only realtor's commission on sale is included in GDP when existing home sells . no used homes are sold .

problems with GDP

non market production (any chores you do yourself)

problems with GDP

underground economy . paying someone (in cash) to clean your home and underreporting this $$$ amount (or not reporting this at all)

problems with GDP

focused on only what buyers pay for things

problems with GDP

biased upward (overstated, making it look too big) because more output now takes place in the market sector or the service section (food service, yard service) and less in the household sector

problems with GDP

biased downward (understated, making it look too small) because of failure to adjust for increased leisure, improvements in the world enviroment

aggravate income

focused on how much the household and the person earns

D

Sweden, where Saab is produced, counts the car as an export (X) which adds to Sweden's GDP.
US, where Saab is purchased, counts the purchase as an increase in consumer spending (C) when the car is sold at the dealership BUT it is ALSO counts as an IMPORT (M), which causes a reduction to NET EXPORTS (NX). Since the values of the purchase of the car (C) and the Import (M) are the same, there is no impact to the US GDP. Essentially, the Saab cancels itself out of counting in US's GDP.

General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP does the Saab increase GDP?

a)
Sweden and the United States

b)
The United States because it was sold there

c)
The United States because GM is a U.S. company

d)
Sweden because it was produced there

economics

the choices we must make among alternatives because of scarcity

False

macroeconomics focuses on the aggregate economy, and microeconomics focuses on small components of that economy.

True/False -
macroeconomics is concerned with economic policy, and microeconomics is concerned with economic theory

scarcity

the human desire for goods exceeds the amount freely available from nature.

D

this is the only option that would count since used products (old bike), previous purchases (lost ECON textbook), and nonmarket production (spouse cleaning house) do not count contribute to GDP.

Which of the following will contribute to GDP?

a)
Your spouse cleans your house every Thursday.

b)
You sell an old bicycle for $100.

c)
You find your lost economics textbook.

d)
You pay a doctor $200 to treat an arm that you broke in an accident.

B
this is the option that does not count towards GDP since it is part of nonmarket production.

Which of the following activities is not counted in our calculations of GDP?

a)
the purchase of a hammer for household repairs

b)
the labor services of a volunteer group building a home for a poor widow

c)
the purchase of new, domestically-produced tires for your old foreign car

d)
a haircut received and paid for at a beauty salon

C

by definition, nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. The non-ECON example we discussed in class was nominal and real gross box office rankings. These rankings changed dramatically once the rise in ticket prices (inflation) was controlled for in the real rankings using base (or reference) year prices.

Which statement represents most correctly the relationship between nominal GDP and real GDP?

a)
Nominal GDP measures base-year production using base-year prices, whereas real GDP measures current production using current prices.

b)
Nominal GDP measures current production using base-year prices, whereas real GDP measures current production using current prices.

c)
Nominal GDP measures current production using current prices, whereas real GDP measures current production using base-year prices.

d)
Nominal GDP measures current production using current prices, whereas real GDP measures base-year production using base-year prices.

D

nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase in nominal GDP is. Real GDP uses base year prices so all inflation increases are eliminated. When real GDP increases it is due solely to an increase in production.

If nominal GDP increases by 4 percent, then

a)
real output has increased by 4 percent

b)
the price level has increased by 4 percent

c)
consumer spending must have increased by 4 percent

d)
it is possible that all of the increase was caused by an increase in the price level

e)
net exports increased by 4 percent

B

GDP = C + I + G + NX = C + I + G + (X - M) = 300 + 100 + 115 + (10 - 15) = 510

Use the table below to answer the next question.

Personal consumption expenditures
$300

Government consumption
115

Rent income
75

Investment expenditures
100

Imports
15

Personal savings
125

Exports
10

Depreciation
50

Gross domestic product equals

a) $550

b) $510

c) $595

d) $610

A

an item is counted in GDP when it is purchased (according to aggregate expenditure approach) which is not a problem if there are multiple time periods involved from time of production to time of purchase. The other 3 answer options are problems with GDP as discussed in class.

Which of the following is not a problem or shortcoming of GDP?

a)
Goods produced in one period that are sold in the following period fail to get counted in any period.

b)
It tends to understate the growth of economic welfare because it does not fully and accurately account for improvements in the quality of products.

c)
GDP is not an accurate measure of welfare because it makes no adjustment for harmful side effects (such as pollution) or destructive acts of nature.

d)
GDP understates output because it fails to include nonmarket production such as that which takes place in the household or in illegal markets.

C

by definition, nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase in nominal GDP is. Real GDP uses base year prices so all inflation increases are eliminated. When real GDP increases it is due solely to an increase in production.

In contrast with nominal GDP, real GDP refers to nominal GDP

a)
minus exports.

b)
minus personal income taxes.

c)
corrected for price changes.

d)
corrected for depreciation.

nominal GDP

measures current production using current prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase is

Real GDP

measures current production using base-year prices. uses base year prices so all inflation increases are eliminated.. when it increases it is due solely to an increase in production.

D
by definition, GDP measures domestic production of a given country. The restaurant meals are purchases. Home cooked meals are part of nonmarket production so they are not included in GDP.

Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has

a)
reduced measured GDP.

b)
not affected measured GDP.

c)
increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously cooked at home.

d)
increased measured GDP by the full value of the restaurant meals.

A

any decrease or decline in real GDP is known as a contraction (or contractionary phase) of the economy. Six months (or 2 consecutive quarters) of contraction in the economy is defined as a recession.

The period of declining growth in real GDP between the peak of the business cycle and the trough is called the

a)
contractionary phase.

b)
boom.

c)
expansionary phase.

d)
stationary phase.

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